Real estate investment trust (REIT) Realty Income (NYSE:O) is one of the largest and most successful players in the net lease space. It is, without a doubt, a bellwether name that dividend investors should be watching, even if they don't own it. Right now, it is doing some pretty good things, but this is really not a great time for investors to jump aboard. That may sound odd, but here's why Realty Income is so great, what the next year likely holds, and why you'll want to wait before adding this reliable dividend payer to your portfolio.

Some background

Realty Income owns a portfolio of roughly 6,000 net lease properties. That means that the REIT's tenants are responsible for most of the operating expenses of the properties it owns. It is a fairly low-risk model, in which Realty Income makes the difference between its cost of capital and the rents it charges. Moreover, it tends to favor long leases, with Realty's average remaining lease term at roughly nine years. That provides stability to its income stream.

A hand drawing a price-versus-value graphic and a bullseye on the low-price/high-value quadrant.

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Roughly 83% of the portfolio is in single-tenant retail assets, 12% in industrial properties, 4% in office, and the rest in vineyards. Roughly 98% of its rent roll is derived from North America, with about 2% of rents coming from Great Britain (a recent development that gives the company an opportunity to expand into a new geographic region). No tenant accounts for more than 6% of rents. The two that are above 5% (Walgreens and 7-Eleven) have a lot of relatively small locations spread across the U.S. market, so the concentration risk isn't as material as it might at first seem. All in all, Realty Income offers investors a great deal of diversification in its portfolio.

Performance-wise, Realty Income likes to brag that it has grown its adjusted funds from operations (AFFO) in 22 of the last 23 years. That's an impressive streak, to be sure, but dividend investors will be more impressed by the 26-year streak of annual dividend increases. That dividend, meanwhile, is paid monthly, so it is kind of like replacing a paycheck.

Realty Income is exactly the kind of REIT an income investor would love to own.

There's a small nuance here

The only problem is that Realty Income might not be the kind of REIT that investors want to buy. That's not a contradiction. At this point, Realty Income's valuation is a bit stretched. For example, the stock's 3.6% dividend yield is near the lowest levels in the company's history. Its stock price is near the highest levels. The company's price-to-AFFO ratio (using 2019 AFFO guidance) is roughly 22 times. That's like a price-to-earnings ratio for an industrial stock, so 22 is a number you would expect of a growth company, not an income stock. And Realty Income is, at its heart, a slow and steady income stock; its average annual dividend growth over the past 10 years is about 4.5%. That's a solid number, but it's hardly impressive.

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Essentially, if you own Realty Income, you're probably pretty happy you do. If you are looking to buy it, you are probably better off waiting for a better price.

But there's another piece of good news for current holders of the stock. As a REIT, Realty Income has to pay out at least 90% of its earnings to shareholders via dividends. That doesn't leave much cash for growth, so REITs generally tap the capital markets to support acquisitions of new properties and ground-up construction efforts. Realty Income is no different.

With interest rates historically low and Realty Income's stock price historically high, its cost of capital is very low today. And as you would probably expect, it is taking advantage of the situation. The REIT will spend more on new assets in 2019 than it has in any year since 2010. In fact, if it hits the high end of its full-year acquisition projections ($3.5 billion), 2019's acquisition spending would be nearly twice 2018's relatively high level. Realty Income is doing the right thing and pushing the accelerator on growth while it has access to cheap capital.

Where will it be in a year?

So in one year's time, Realty Income will likely be a larger REIT. However, it will also likely continue to be an expensive REIT. Which, in turn, should allow it to continue to grow at a rapid clip. This is good news for investors who own Realty Income today. But investors looking at the company as a possible new addition to their portfolios would be better off adding this one to the wish list than the buy list. Although the REIT derives significant benefits from its premium valuation, the lofty price tag makes it much less desirable as a new purchase.