When it comes to rock-solid dividend stocks, it's tough to find anything not to like about Realty Income (O +0.72%). The company has one of the most impressive streaks of dividend increases in the market, it has delivered market-beating performance throughout its history, and it doesn't have significant exposure to the troubled areas of retail.
Here's why long-term dividend investors should keep this real estate investment trust (REIT) on their radar.
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Realty Income: The quick version
Realty Income is a net-lease REIT that focuses on freestanding, single-tenant properties. The portfolio consists of 5,062 properties as of the third quarter, and about 80% of the portfolio by rental income is made of retail properties. The company's portfolio also has a significant amount of industrial and office properties, and a small amount of agricultural properties.
If you're not familiar, a "net lease" is a form of leasing arrangement that is common among single-tenant commercial properties. These leases typically have a long initial term (15 years or more) with annual rent increases, or escalators, built in. Tenants are responsible for property taxes, building insurance, and certain maintenance expenses -- the combination of which is why these are often referred to as triple-net leases.
From a landlord's perspective, net leases are favorable for a couple of reasons. First, they eliminate the variable expenses of owning property. If property taxes or insurance costs spike, that's the tenant's problem. Second, their long lease terms minimize vacancy and turnover risk. Finally, they provide a predictably increasing income stream.
It's not the risky kind of retail
Many investors are hesitant to get involved with any retail-oriented investment, and it's not hard to understand why. So far in 2017 alone, there have been 22 significant retail bankruptcies, including high-profile companies such as hhgregg and Toys R Us.
However, the vast majority of Realty Income's retail tenants have either a low-price, non-discretionary, or service-oriented component to their business. This keeps them insulated from e-commerce competition and also adds recession-resistance. Nineteen of those 22 bankruptcies this year lacked one of these components. Furthermore, all of the retail bankruptcies in 2017 represent less than 1% of Realty Income's rental revenue.
It's tough to find a better dividend history
Since Realty Income first listed on the NYSE in 1994, the company has increased its dividend a total of 93 times -- an average of about 3.4 times per year. More recently, the company has focused on quarterly increases, and has done so without fail for 80 quarters in a row.
The dividends are paid in monthly installments, and the numerous increases have averaged a 4.6% annualized growth rate. And Realty Income has never cut its dividend as a public company. In fact, the median dividend activity in 2009 among REITs was a 25% cut, and Realty Income managed to increase its payout by 2.7%. Including its time as a non-listed REIT, Realty Income has made 568 consecutive monthly dividend payments.
Strong results should keep the dividend increases coming
Realty Income's third-quarter earnings show strong growth that should allow the company to continue to raise its dividend going forward.
Adjusted funds from operation (AFFO) increased by 6.9% year over year to $0.77 per share, which outpaced the company's 5.7% dividend growth rate. Occupancy remains strong at 98.3%, which shows how strong and e-commerce-resistant Realty Income's tenants are. And, Realty Income's balance sheet is incredibly strong. The company's fixed-charge coverage ratio recently reached its highest level ever after a recent capital raise.
For the full year 2017, Realty Income is expecting AFFO in the $3.03 to $3.07 range. Based on the midpoint, the current dividend rate represents a payout ratio of 83% -- which is quite reasonable for a REIT and leaves room for further dividend increases. In a nutshell, I'd be surprised if Realty Income's dividend didn't increase by at least another 5%-6% by this time in 2018.
A final thought
As you can probably sense, I'm a big fan of Realty Income. In fact, it is one of my largest stock holdings in my own portfolio.
However, it's important to mention that it can be rather volatile over shorter periods of time, and is best suited for investors who have long time horizons to ride out the ups and downs. Just to name one near-term risk factor, if interest rates end up rising faster than expected, it could create significant downward pressure on the stock's price. In short, if you'll need your money within a few years, you're better off looking elsewhere.
Having said that, any weakness that does occur in the stock should be temporary. Over the long run, Realty Income has a winning business model and a top-notch management team that should deliver strong returns for investors.
