Some of the best companies for dividend investors are real estate investment trusts (REITs). These companies are able to avoid most corporate taxes if they pay out most of their income as dividends.
That said, some REITs have more predictable business models than others. Last year, during the pandemic, we saw some REITs struggle mightily, while others carried on with minimal impact. One of the latter is Realty Income (O 0.11%). What was different about this REIT and why was it able to largely shrug off the pandemic?
Image source: Getty Images.
Realty Income has a highly resilient business model
The REIT owns 6,761 properties in the United States and the United Kingdom. The company develops single-tenant spaces and rents these out via triple-net leases. In a triple-net lease, most of the expenses are pushed onto the tenant, including taxes, insurance, and maintenance.
The other common type of lease is called the gross lease model, and this is usually seen in malls and other retail outlets. Most people are familiar with gross leases, which are similar to renting an apartment. The landlord is responsible for taxes, some insurance, and maintenance, while the tenant makes the monthly rent payment. These leases typically have longer terms and annual escalators. Realty Income targets investment-grade clients, and during the quarter ended June 30, half the company's revenue came from investment-grade clients.
Tenants come from defensive industries
Realty Income seeks tenants in highly defensive industries that are more insensitive to the economic cycle. Its typical tenant is a dollar store, convenience store, or drugstore. Last year, the company's biggest tenants were Walgreen's, 7-Eleven, Dollar General, FedEx, and Dollar Tree. During the pandemic, the vast majority of Realty Income's tenants were considered essential businesses and stayed open. While the company did have some exposure to movie theaters, health and fitness facilities, and child care centers, the loss of rental income from these tenants did not affect the dividend. During the pandemic, the company's collection rate bottomed out at 84.9% during the month of May 2020. In the second quarter ending June 2021, the collection rate increased to 95.9%.
A long track record of success
Realty Income has had success going back over 50 years. It has navigated some of the most difficult economic shocks, from the Great Recession to the coronavirus pandemic. The company is a Dividend Aristocrat and has a 26-year track record of consecutive annual dividend increases. It also pays its dividend monthly, which some investors prefer. The stock currently yields 3.93% and the company just hiked its dividend in June.
It's not the type of stock that will satisfy an investor seeking rapid growth. If you are looking for a nice pop, Realty Income is probably not the right company for you. But for investors looking for a stable income stream that will be resilient through tough economic times, Realty Income is a stock worth exploring.
