No one is surprised that Realty Income (O 3.09%) is boosting its dividend this week, just three months after its last hike. Increasing its payouts on a quarterly basis is just in the DNA of the real estate investment trust (REIT). This time around the move may stand out for the roundness of the milestone. We have now seen Realty Income jack up its yield 110 times since going public in 1994.
Realty Income does stand out as one of the few REITs that happen to declare monthly distributions instead of once every quarter. The hike, as you might imagine, is basically slivers of a penny. Realty Income's monthly rate will go from $0.2345 to $0.235 per share. The yield is barely nudged higher to 4.4%. However, the more you learn about Realty Income the more impressive it becomes that it's been able to keep this string of higher payouts going.
Brick by brick
Realty Income's portfolio consists largely of brick-and-mortar retailers. The paradigm shift to e-commerce may make Realty Income susceptible to consumers shopping online, but that's also why it has emphasized services, non-discretionary retail, and deep discounters that aren't as easily replaced by digital alternatives.
The strategy is working. It has managed to grow its earnings in 24 of the past 25 years. However, the pandemic has proven particularly challenging for some of its gym and multiplex tenants. Health and fitness centers and movie theaters account for 7% and 6% of its portfolio, respectively, and there are a lot of deadbeat tenants in that group. Realty Income collected just 93.6% of its contractual rents in the fourth quarter, and cinema operators accounted for 80% of the missed payments.
There are also some long-term concerns when it comes to its larger categories. Convenience stores make up 12% of the Realty Income portfolio. The second-largest of its roughly 600 tenants is 7-Eleven. Will convenience stores with gas pumps be susceptible to the shift to electric vehicles? Grocery stores and pharmacies make up the next two largest categories at Realty Income, and we're already seeing the world's largest online retailer start to make plays for consumer-direct platforms on both fronts.
For now you have to give Realty Income the benefit of the doubt. It has a better read on the pulse of its tenants than anybody else. It can and will tweak its portfolio if any retail class proves to be a long-term challenge. It's just one of three REITs to come through with increased payouts for at least 25 consecutive years, making it a rare Dividend Aristocrat.
With a run of 94 consecutive quarterly dividend hikes it has earned the right to be respected until it proves mortal. The gym operators and movie theater chains on its books should improve their chances of covering rent in 2021 as the vaccination process plays out in tackling the COVID-19 crisis. This isn't likely to be Realty Income's last quarterly hike. It's here to play. It's here to pay.