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Buy This Dividend Aristocrat and Rest Easy

By Reuben Gregg Brewer – Sep 8, 2021 at 7:15AM

Key Points

  • A good night's sleep is priceless for a dividend investor.
  • This REIT stock, despite being fully valued, is worth a close look today.
  • Even though it is selling at a premium price, that too can be seen as a benefit.

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It's not cheap, but this reliable dividend payer lives up to its nickname, the "Monthly Dividend Company," and has for years.

Sometimes it's worth paying for quality, especially when you are looking for a reliable and growing dividend stream. That is why this particular real estate investment trust (REIT) stock, despite being on the expensive side, is a desirable option for conservative income investors. Here are five reasons why Realty Income (O 0.51%) will help you rest easy.

1. Realty Income has a great dividend history 

This is first things first if you are looking at a dividend stock. Realty Income has increased its dividend annually for 26 consecutive years, making the landlord a Dividend Aristocrat. Over that span, Realty Income's dividend has increased at an annualized rate of 4.4%, which is higher than the roughly 3% historical rate of inflation growth. So, the buying power of Realty Income's dividend has increased over time.

A sign with the word DIVIDENDS next to a money roll.

Image source: Getty Images.

That's a lot to like, but that's not all there is to like. The real estate investment trust's dividend is also paid monthly. That makes it similar to collecting a paycheck and can simplify the budgeting process for those attempting to live off the dividends they collect. On top of that, Realty Income has a penchant for hiking its dividend on a quarterly basis. The most recent hike, announced in June, was number 111 since the REIT's IPO. If you are looking to create a consistent income stream, Realty Income has a track record that's hard to beat. 

2. Realty Income is financially strong

A good dividend record alone, however, isn't enough to keep you sleeping at night. That's why it's so comforting that Realty Income has an investment-grade-rated balance sheet. That helps keep interest costs down, ensures it can tap debt markets when needed, and provides a backstop against adversity. Far too often dividend investors chase yield without giving enough credence to what's backing that payment. In Realty Income's case, the foundation is just as solid as the dividend record it's supporting.

3. Realty Income is a conservative industry giant

The basic business model here is also very attractive. Realty Income is a net-lease REIT, which means that its tenants are responsible for most of the costs of the properties they occupy. It's a fairly low-risk approach to real estate ownership that leaves Realty Income to (simplifying things a bit) just sit back and collect the rent. It makes the difference between its cost of capital and the rents it collects.

This is a very scalable model and Realty Income has been using it for a long time. At this point, it has a massive portfolio of around 6,500 single-tenant properties. No one building has a material effect on the company's performance. That said, around 85% of rent comes from the retail sector, which is something to understand but, given the size of the portfolio, not get too upset about. The REIT also owns industrial assets and has some exposure to Europe, so there's a bit of diversification in the mix.

It's also worth noting Realty Income's $28 billion market cap. It is easily one of the largest players in the net lease space, portfolio-wise and market cap-wise. Size provides benefits, including accessing capital and spreading costs over more assets. Scale is just one more reason to like this industry-leading REIT.

4. Realty Income is about to get better

So Realty Income is already a big net lease REIT. But it has agreed to buy peer VEREIT, which will push its portfolio over the 10,000-property mark. The merger is expected to be 10% accretive to Realty Income's results from Day 1, and it has ongoing benefits as VEREIT's higher-cost debt gets rolled over to Realty Income's lower rates.

The combined company will be the undisputed ruler of the net lease space, able to take on deals that smaller peers couldn't handle. And Realty Income plans to spin off office properties it will own into a new REIT, effectively removing a less desirable asset class from the portfolio mix. In summary, Realty Income is a great REIT that's about to get even better.

Chart of Realty Income's price, dividend yield, and dividend per share.

O data by YCharts

5. Its strong performance is a mixed blessing

There are a lot of positives here and investors are well aware of them all. That's why the roughly 4% dividend yield is toward the low end of Realty Income's historical yield range. You are paying at least full fare if you buy the REIT today, suggesting that investors with a value bias should look elsewhere. But before writing Realty Income off as too expensive, consider that cost of capital is a key factor in its business model. For example, the VEREIT deal is an all-stock transaction, which means Realty Income is "paying" with its highly valued shares.

Buying today means you are paying up for a good company, but that premium price also gives Realty Income a competitive edge that will help it maintain its industry-leading position. So valuation is not a positive here, but it isn't exactly a negative, either.

Know what you own

If you are looking for a dividend stock that will help you sleep well at night, Realty Income has proven it can meet your needs. That said, it is not a bargain and rarely is, given its many strengths. However, if you recognize this fact and see the benefit of paying up for quality, that may not be such a bad thing.

Reuben Gregg Brewer owns shares of VEREIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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