Real estate investment trusts (REITs) often make the best dividend stocks. To maintain their tax advantages, these entities need to pay out 90% of their taxable income via dividends. Because of that, REITs often have above-average dividend yields.
Many REITs also have a long history of growing their dividends. One of the more remarkable track records in the sector comes from Realty Income (O -0.62%). Here's a closer look at this elite dividend stock.
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One chart says it all
Realty Income takes great pride in its dividend. The REIT, which calls itself The Monthly Dividend Company, aims to live up to its name by delivering dependable monthly income that rises steadily over time. That's exactly what it has provided to investors throughout its history.
Data source: Realty Income.
A few things stand out about that chart. First is the longevity of its dividend growth. Realty Income has increased its dividend for 27 straight years.
Another thing that stands out about Realty Income's dividend is the frequency of the increases. Whereas most dividend stocks aim to increase their payouts once per year, Realty Income has given its investors four or more raises annually for nearly a quarter-century.
Finally, consider the rate of dividend growth. Realty Income's 4.4% compound annual growth rate is ahead of the 2.9% yearly pace of other large REITs in the S&P 500. Furthermore, the company has no years with negative dividend growth, whereas its peers have delivered negative dividend growth 11% of the time. Realty Income's ability to deliver consistent growth during a time when many REITs had to reduce their dividends is a testament to its durable strategy.
The secret to the REIT's dividend success
Realty Income has delivered such steady dividend growth because it has consistently increased its adjusted funds from operations (AFFO) per share. Since 1996, the REIT has grown its AFFO per share at a median rate of 5.1%. It has delivered positive earnings growth in 25 of the last 26 years.
A big factor is the overall stability of its real estate portfolio. The REIT owns a diversified portfolio of net lease real estate leased to tenants resilient to economic downturns and isolated from the pressures of e-commerce. The net lease structure makes its tenants responsible for maintenance, building insurance, and real estate taxes, enabling Realty Income to generate stable rental income. Meanwhile, the property focus increases the overall durability of that income stream.
Realty Income complements its rock-solid portfolio with a top-notch financial profile. It has a reasonable dividend payout ratio for a REIT -- 78.5% of its AFFO last year -- and is one of only seven REITs with A-rated credit. That gives it the cushion to continue increasing the dividend during down years while also providing the financial flexibility to grow its portfolio. The REIT has a long history of making value-accretive acquisitions that have expanded its AFFO per share. It's very selective, only acquiring properties that meet its strict criteria.
One of the best dividend stocks in the REIT sector
Realty Income has done a phenomenal job growing its dividend over the years. Its longevity, frequency, and above-average growth rate make it stand out in a sector known for paying dividends. These factors make it one of the best REITs to own for investors seeking to collect dependable passive income that will rise steadily over time.
