Realty Income Corporation (O 0.24%) isn't going to make you rich overnight, but that's not the point of owning it. It is designed to produce bulletproof income month after month, regardless of what is going on in the economy or the rest of the stock market.
Having said that, don't make the mistake of thinking Realty Income is boring or that it is likely to produce subpar returns. In fact, in the nearly three decades since it was listed on the NYSE, it has done the exact opposite for investors. Here's why Realty Income has an unmatched combination of income, growth potential, and safety that can make it a dividend investor's dream.
Image source: Getty Images.
Realty Income in a nutshell
Realty Income is a real estate investment trust (REIT) focused on single-tenant net-leased properties. The bulk of its portfolio is occupied by retail tenants, with a significant number of industrial properties. It also recently agreed to acquire the Encore Boston Harbor Resort and Casino property, which gives the company exposure to gaming real estate as well.
As of the end of 2021, Realty Income owned just over 11,000 properties and was one of the 10 largest REITs in the market. It owns properties throughout the United States and has recently been expanding into the U.K. and Spain.
Built for stability and market-beating performance
Many investors hear "retail" and immediately get nervous, but it's the types of retail tenants in Realty Income's portfolio that make it a great income investment. Specifically, the tenants in Realty Income's properties generally fit into at least one of the following categories:
- Non-discretionary (selling things people need)
- Service-based
- Discount-oriented
As an example, Realty Income's largest tenant is Walgreens (WBA -1.18%), which falls into the first category. People shop at Walgreens for items they need, such as medication. FedEx (FDX -0.21%) is one of the five largest tenants in the portfolio and falls into both the non-discretionary and service-based categories. Dollar stores, convenience stores, warehouse clubs, grocery stores, and restaurants are just a few other common property types you'll find in Realty Income's portfolio.
The idea is that Realty Income's tenants are recession-resistant and also aren't too vulnerable to e-commerce headwinds. Tenants sign long-term net leases. If you're not familiar with that term, a net lease requires the tenant to cover most of the variable costs of property ownership, specifically taxes, insurance, and most maintenance items. What's more, these leases typically have annual rent increases, or escalators, built-in.
Realty Income grows rather aggressively through acquisitions, using a combination of equity and debt to fund them. In 2021 alone, Realty Income invested $6.4 billion to add over 900 properties to its portfolio and expects more than $5 billion in acquisition volume in 2022.
Speaking of growth, don't make the mistake of thinking that Realty Income has come close to maxing out its opportunity just yet. Realty Income's enterprise value (including debt) is about $57 billion today. Its addressable market of net lease properties is worth about $12 trillion worldwide. With top-notch credit and a track record of delivering value for investors, Realty Income could get much larger in the years to come.
The best overall dividend stock in the market?
I've said before that Realty Income is perhaps the best all-around dividend stock in the market, and for several reasons. It doesn't have the highest yield, and there are some dividend-paying stocks with higher growth potential. But the combination of low volatility, steady and growing income, and long-term total return potential is tough to beat. Consider these numbers:
- Realty Income has paid 620 consecutive monthly dividends, dating back over 50 years.
- Realty Income has produced positive earnings growth in 25 of the 26 full years it has been publicly listed.
- The stock has increased its dividend 115 times since its 1994 NYSE listing, including the past 98 consecutive quarters, at an average growth rate of 4.4% per year.
- Realty Income has produced an annualized total return of 15.5% since its 1994 NYSE debut. To put this into perspective, a $10,000 investment at that time would have ballooned to more than $550,000 today if all dividends were reinvested.
And finally, Realty Income has achieved all of these metrics with volatility that is significantly lower than the average S&P 500 company. If you're looking for a great income stock that can produce market-beating long-term returns while still allowing you to sleep at night, Realty Income should be on your radar.
