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Looking for Ideas as Stocks Sell Off? Try This Dividend Aristocrat

By Jennifer Saibil – Sep 21, 2021 at 7:02AM

Key Points

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If you like dividend stocks, consider this one that pays you monthly.

Many investors love dividends, and for good reason. Enough money invested in a high-yielding dividend stock could provide a sizable income, which is why dividend stocks are so popular with retirees. And some of the best dividend stocks are REITs (real estate investment trusts), because companies structured this way are required to pay out 90% of their income as dividends.

Monday's pullback might have you wondering which income stocks will hold up best if the market continues to fall. Realty Income (O 1.37%) is one REIT that pays a high-yielding monthly dividend, and it's a great place to start.

A man and woman holding shopping bags and looking at a store window.

Image source: Getty Images.

A stable source of income

Realty Income owns more than 6,700 properties and leases them to retailers. It uses a triple net lease model, which means that its tenants pay for most operating expenses, such as real estate taxes and building insurance. 

In an era of retail uncertainty, Realty Income focuses on businesses that can't easily be replaced by e-commerce. Its top tenant, accounting for 6% of contractual annualized rental revenue, is convenience store chain 7-Eleven, and other top holdings include Walgreens, Dollar General, and Walmart -- all companies that were considered essential and stayed open during the pandemic lockdowns.

Leasing to stable companies with relatively consistent business means that Realty Income doesn't need to worry about not getting the rent. That became even more important when stores were closed last year and other REITs saw their income tumble. In the second quarter of 2020, amid the worst of the pandemic restrictions, Realty Income collected 87% of its rent, and that went back up to 93% in the third quarter. It came in at 99% in this year's second quarter. Realty Income says that 96% of its portfolio is in the resilient category, and most of these stores stayed open throughout restrictions, making more sales than ever. That put Realty Income in an exclusive class of REITs that continued to perform well during the worst of the pandemic.

Within this portfolio of strong companies, Realty Income is also well-diversified among industries, to spread any risk and ensure more predictable cash flows. It has 630 unique clients operating in 58 industries with a portfolio occupancy rate of 97.9% for 2020 -- a slight drop from 98.6% in 2019, but excellent considering the operating environment last year. Sales increased 10% in 2020 year over year, and adjusted funds from operations (AFFO, a metric REITs use that's similar to net income), increased by $0.07, or 2%. In this year's second quarter, sales increased 12% year over year and AFFO increased by another 2%.

Where the stock is going

Realty Income is a top 10 global REIT, and it's angling to get into the top five. The company sources potential properties and then selects the best, and a high sourcing volume -- $64 billion in 2020 and $40 billion for 2021 -- results in a higher selectivity rate. It has already acquired $2.2 billion in properties so far in 2021, and as it grows its portfolio, income increases, which fuels the dividend.

Last year the company announced a deal to merge with VEREIT, which would bring the total property count to more than 10,000. The deal is expected to close in the fourth quarter. Many of VEREIT's top tenants are like Realty Income's, businesses with a strong physical presence such as Walgreens and FedEx. Interestingly, its top tenant is restaurant chain Red Lobster, which has more risk exposure than the typical Realty Income tenant.

Dividends and more

Realty Income's stock yields almost 4.2% at Monday afternoon's prices. It recently became a Dividend Aristocrat, which means it's raised its dividend annually for at least 25 years. Realty Income is one of only three REITs with this designation, and it connotes a stable and reliable dividend.

Don't expect high growth from Realty Income's stock price; without dividends, the stock price is flat over the past five years. The benefit of this stock is in its dividend, and it's a natural choice, at any time, for anyone looking for a great dividend stock. 

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FedEx and Home Depot. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

Stocks Mentioned

Realty Income Stock Quote
Realty Income
O
$63.57 (1.37%) $0.86
Walmart Stock Quote
Walmart
WMT
$149.11 (-0.52%) $0.78
FedEx Stock Quote
FedEx
FDX
$172.28 (-0.45%) $0.77
Cvs Health Stock Quote
Cvs Health
CVS
$102.28 (1.08%) $1.09
Walgreens Boots Alliance Stock Quote
Walgreens Boots Alliance
WBA
$40.65 (0.15%) $0.06
Home Depot Stock Quote
Home Depot
HD
$320.15 (0.85%) $2.70
Dollar General Stock Quote
Dollar General
DG
$248.97 (1.43%) $3.52
VEREIT Stock Quote
VEREIT
VER

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

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