This Stock Delivers Reliable Returns Without the Volatility of the S&P 500

Do monthly dividends and positive earnings growth for several consecutive years sound like a good investment? In this segment of "The Rank" on Motley Fool Live, recorded on March 7, Fool contributors Matt Frankel, Jason Hall, and Tyler Crowe take a look at Realty Income (O -0.26%), a REIT with a long track record of success.

Matt Frankel: They are a net lease REIT. What that means is they buy primarily freestanding properties that are leased to tenants using so-called net lease agreements. A net lease means that the tenant generally signs a long-term lease, say 10-15 years for the initial term. Annual rent increases built-in, these are called escalators, and the tenants agree to pay most of the variable costs of property ownership, specifically property taxes, building insurance, and most maintenance expenses.

In other words, a net lease landlord has to get a tenant in place and they know what their income is going to be for the next 10 or 15 years. It's a really steady income business model, and there's a lot of upside potential because it's backed by these underlying real estate assets that tend to increase in value over time as well.

Real estate companies use a little bit of leverage, not a ton. It's similar to buying a house with a mortgage is the concept behind it. Then they issue equity and things like that that grow over time. Realty Income started in 1969 with one Taco Bell [a part of Yum! Brands (YUM -0.30%)]. They owned a Taco Bell building that Taco Bell operated in. Since that time they have built their portfolio. Look at some of these numbers and I'll go through each real quick.

Over 11,000 properties under long-term lease agreements in all 50 states, Puerto Rico, the United Kingdom, and Spain. They're in 60 different industries, primarily different forms of retail. But I'll get to that in a second why I think that's still safe. Look on the left side of your screen. Remember, this stock's historical beta was about 0.5 meaning it was about half as volatile as the S&P 500.

Since it listed on the New York Stock Exchange in 1994, it's generated an average annualized return of more than 15%. They have paid 619 consecutive monthly dividends, dating back to their early days in the late 60s, early 70s. Since listing, they've increased that dividend for 97 consecutive quarters. This company is built to produce steady income like clockwork.

I just want to hit on a few points of why I think this is safe, and why I think it's a great risk-reward ratio. For one, it's generated positive earnings growth 25 out of 26 years it's been a publicly traded company. I want to say it was 2008 was the only year it didn't. It has a great top-notch credit rating, it's really rare for a REIT to have grade A credit. Its beta is very low. It's one of the largest REITs, and 94% of its rent comes from resilient types of properties.

Think of discount stores, Costco (COST -0.41%) is a big tenant of theirs. Things like the major dollar stores are big tenants of theirs. Non-discretionary retail, things that people need, not that they want, CVS (CVS -0.73%) and Walgreens [a part of Walgreens Boots Alliance (WBA -0.48%)] are both big tenants of theirs, and service-based retail big restaurants. I mentioned Taco Bell was their first tenant. Things that don't depend on E-commerce specifically, and things that are not prone to recessions.

During a recession, CVS and Walgreens are going to be just fine. Dollar stores are going to do even better than they do now during recessions. It's not a typical retail stock. This is the first stock I ever bought when I became a serious investor. I've never sold a single share and I have added many times. I've called this the best overall dividend stock in the market, and I could make a solid case for this to be my No. 1. Guys, any thoughts on Realty Income?

Jason Hall: Yeah. I just think this hits home. You were talking about their tenant list. I think this is a big reason why the credit agency is rated so highly is because its counter-parties on its properties are bulletproof. Walgreens is its largest tenant, 4.1% of its net operating income. Then you got Dollar General (DG 0.01%), 7-Eleven [a part of Seven & I Holdings (SVNDY -0.23%)], Dollar Tree (DLTR -1.08%), and Family Dollar, those are about as recession-resistant as they get. I think its biggest recession by consumer discretionary business is LA Fitness, and that's 2.5%. It's just a rock steady, wonderful business. It really is.

Tyler Crowe: I'm sorry, I'm coming way out of left field on this one [laughs] because everything you guys said is great, and one thing, I think we've been talking about this a little bit with some of the services we work on with Winners, Trailblazers and things like that is we're seeing a lot of places in the real estate market where repositioning and multi-use development is becoming a huge thing.

A lot of the property types that are in Realty Income's portfolio are the kind of ones that would be right for those multi-use redevelopments. There's a similar grocery store-anchored retail REIT, Kimco Realty (KIM -0.57%), that's pushing really hard into the multi-use tenant. I'm curious to see if a big player like Realty Income would be willing to make that splash. They're so good at what they do, they don't have to.

Hall: Yeah.

Crowe: But I feel like the potential of returns and growth on an existing portfolio could go incredible with that kind of deployment.

Frankel: They're really showing their willingness to branch out right now. You mentioned they're really, really good at what they do and there's no denying that.

Crowe: It's mainly the single tenant is their core. That's what they do overall.

Frankel: They focus on single tenant, that's their big differentiator. They have some industrial and office portfolios. What was really interesting about their office properties before they spun them off, they only owned single-tenant office buildings, which is a rarity in the space. The reason being that net lease model doesn't work as well in, say, a mall where you have a bunch of different tenants. You have to split up the property taxes, you have to split up the insurance costs, things like that.