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Is Realty Income a Great Dividend Stock?

By Dave Kovaleski - Updated Mar 7, 2021 at 9:56AM

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With a high yield and monthly payouts, it's one of the best for dividends.

Income investors typically view a stock's performance differently than those who invest for long-term returns. If you are an income investor, you look more closely at the dividend to see how consistent, sustainable, and high-yielding it is. Of course, good solid annual returns are important too, but they're secondary for those seeking income.

There are a lot of good dividend stocks on the market, and some great ones. Realty Income (O 1.25%) would be classified as a great one. Here's why.

12 payouts per year

Realty Income is a real estate investment trust, or REIT, which owns a portfolio that includes more than 6,500 commercial properties. The properties all have long-term lease agreements, with some 600 different clients in 51 industries in 49 states, as well as Puerto Rico and the United Kingdom. The largest clients include Walgreens, Dollar General, Dollar Tree, 7-Eleven, Circle K, and Walmart, to name a few.

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Image source: Getty Images.

As a REIT, Realty Income is required by law to pay out 90% of its taxable income in dividends. This is the trade-off for not having to pay corporate taxes. As a result, REITs often pay the best dividends on the market, and Realty Income is one of the best of the best.

Unlike most dividend-paying stocks, which distribute payments quarterly, Realty Income pays dividends every month. It pays out $0.23 per share each month for a yield of 4.6% at Friday's close, which is higher than the average yield on the S&P 500, the Dow Jones Industrial Average, and the Equity REIT Index.

Realty Income pays out $2.76 per share each year. So, if you owned 500 shares at its current $60 per share stock price, you'd have $115 in passive income each month and $1,380 per year.

Realty Income prides itself on its dividend -- it's even in the company's branding as "The Monthly Dividend Company." Its commitment to that monthly dividend has resulted in 28 straight years of dividend increases at a compound annual growth rate of 4.4%. That qualifies it as a Dividend Aristocrat

Sustainability and growth

So Realty Income has a great track record of sustaining its dividend, but how does it look going forward?

The company has a pretty low-risk business model as a net-lease REIT. It signs long-term leases, usually 10 to 20 years, with single-tenant commercial businesses, most of them established retail chains. Realty Income basically collects the rent with the renter responsible for most of the operating costs.

Last year, a difficult one for many businesses, showed how dependable Realty Income's business model is. Despite the shutdowns, Realty Income maintained a 97.9% occupancy rate, down only slightly from 98.6% a year ago. It also collected 93.6% of contractual rent in the fourth quarter, which was up from 82% in May. The biggest hit came from the 78 theater properties it owns, which represent about 5.6% of contractual rent, but otherwise, the numbers were solid.

Overall, the company's revenue increased about 6.7% in 2020 to $1.6 billion, and funds from operations, a key measure used by REITs to determine cash flow, was up 9.9% to $1.1 billion. The company increased the size of its portfolio and was able to collect most of its rent under the most difficult of circumstances. This year it should be able to generate earnings growth with GDP growth anticipated and a recovery in the commercial real estate market.

Realty Income's stock price was down about 11% in 2020, but it remains one of the best dividend stocks on the market and should continue to deliver increasing annual payouts for income investors.

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Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$67.99 (1.25%) $0.84
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$119.20 (0.11%) $0.13
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$40.96 (0.86%) $0.35
Dollar General Corporation Stock Quote
Dollar General Corporation
$187.60 (-6.82%) $-13.73
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
$127.88 (-5.67%) $-7.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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