Income stocks are often included with "safe" stocks since they typically attract the same type of investors: Retirees and those close to retirement who are looking for steady dividends and capital preservation. To be considered a safe stock, a company must have a track record of performing well under a variety of market conditions and across economic cycles. Realty Income (O 0.16%) is a real estate investment trust (REIT) that has an enviable record of performance that started in the late 1960s. Is it right for you?

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Introducing "The Monthly Dividend Company"

Realty Income distributes its payouts on a monthly basis -- in fact, it has adopted the moniker "The Monthly Dividend Company." It's also a Dividend Aristocrat, one of the few S&P 500 companies with a streak of annual dividend hikes that's 25 years or longer. The company's business model is based on building single-tenant properties and leasing them out to highly stable companies. At the end of 2020, it owned 6,592 properties with 110.8 million square feet of leasable space.

Realty Income is a triple-net lease REIT, which means it requires its tenants to cover most of the expenses related to the properties they lease, including taxes, maintenance, and insurance. These types of agreements are typically long-term and have automatic rent increases built in. By contrast, gross leases -- the typical type of retail lease -- require the tenant to only pay rent, and are typically shorter in duration.

Despite COVID-19, collections held up

While many REITs have struggled during the COVID-19 pandemic, Realty Income fared better than most due to its focus on stable, investment-grade clients. Most of the company's tenants were considered essential businesses, so they were able to stay open during the various shutdowns. Its biggest tenants include Walgreens, 7-Eleven, Dollar General, FedEx, and Dollar Tree/Family Dollar. While rent collections did slip in 2020 as some tenants (particularly restaurants, movie theaters, fitness centers, and child-care centers) were unable to operate their businesses, collections were still in the mid-80% range even during the most intense phase of the pandemic's economic impact. By the end of the year, collections had rebounded to 93.6%. 

Despite COVID-19, Realty Income raised its dividend twice in 2020, in June and December. At Wednesday morning's prices, its dividend yields 4.3%. Last year, the company paid $2.80 per share in dividends and earned adjusted funds from operations, or AFFO, of $3.39. (Funds from operations is the metric REITs prefer to use in place of net income -- since REITs generally have a lot of depreciation charges, net income numbers tend to understate their cash earnings.) Realty Income pays out 83% of its AFFO in dividends, which is about right for a mature REIT. 

Over the past five years, Realty Income shares have generally traded at levels that put its dividend yield in the 3% to 5% range, with the exception of the early days of the pandemic. The REIT isn't as cheaply valued as it was a year ago, but is still priced reasonably. 

O Dividend Yield Chart

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Realty Income is trading at 19 times last year's AFFO per share, which is a reasonable valuation given the stability of the business model. The company is leveraged, but its AFFO coverage ratio (AFFO divided by interest expense) is 3.8, which gives the company leeway if market conditions become difficult. Conditions during the earlier stages of the COVID-19 pandemic were about as bad as they could get for this business, and Realty Income still managed to raise its dividend twice. Investors who are attracted to safety and income should take a closer look at Realty Income.