A great alternative for dividend investors looking for safe and steady income are real estate investment trusts (REITs). These companies often feature highly resilient business models that can shake off big economic shocks.
One such REIT is Realty Income (O 0.92%), which navigated the COVID-19 crisis well, managing to hike its dividend three times during 2020. This is a claim that very few companies can make, and it demonstrates why Realty Income should be a core holding of an income investor's portfolio.
Triple-net leases provide visibility and stability
Realty Income's specialty is developing stand-alone properties and then renting them out to its tenants. The company uses a special kind of lease called a "triple-net" lease. Under these types of leases, the tenant is responsible for covering taxes, maintenance, and insurance on the property. The triple-net lease is less prevalent than the gross lease, which is the usual model for most retail leases. Under the gross lease, the tenant pays rent and the landlord handles all of the maintenance, insurance, and taxes. The gross lease most closely resembles an apartment lease.
Triple-net leases are really only suitable for the highest-credit-quality tenants. The terms are typically long (averaging 10 years), and they contain automatic yearly rent increases. The benefit of this arrangement is that it gives Realty Income a highly stable rental income stream. For the tenant, it provides certainty, and allows them to focus on running their business. Realty Income also has the ability to borrow money cheaper than many of its tenants, and some of that financing advantage gets passed onto the tenant in the form of lower rental costs.
Realty Income's defensive nature helped during the COVID-19 pandemic
Realty Income's top tenants are in highly defensive businesses and many were considered "essential businesses" during the COVID-19 pandemic. The top 5 tenants for the company include Walgreen's, 7-Eleven, Dollar General, FedEx, and Dollar Tree. During the COVID-19 crisis, Realty Income's worst month for collections was May of 2020, and even then Realty Income collected 84.9% of its owed rent from 98% from its investment-grade tenants.
While the company's main tenants were able to remain open during the pandemic, some businesses like movie theaters, fitness centers, and education establishments were forced to temporarily close. Even today, its theater properties continue to be a drag on collections, with Realty Income collecting only 38.3% of contractual rent in the latest quarter ending June 30. Overall collections for the quarter were 95.9%.
This Dividend Aristocrat knows how to reward investors
Realty Income's record of dividend payouts qualifies it for designation as a Dividend Aristocrat, which are S&P 500 companies that have raised their dividends annually for at least 25 straight years. Realty Income pays a monthly dividend, and it hiked it three times during 2020 (twice during the actual pandemic).
The company has been around since 1969, and it has managed to perform well through many economic cycles. The COVID-19 pandemic was one of the toughest tests that a company like Realty Income could face.
At current levels, the company's dividend yield works out to 4.2%. For income investors looking for stability in their holdings, this stock is one that should be at the top of the list.