Dividend investors love investing in real estate investment trusts (REIT) because they typically offer high yields. But there are different kinds of REITs, such as mortgage REITs and retail REITs, and they're not all equally reliable.
Realty Income (O +1.87%) is a retail REIT that easily weathered the early stages of the pandemic when other retail REITs were dealing with rent defaults. It's also doing great compared with mortgage REITs, which are dealing with fluctuating interest rates. The stock yields 4.4% at the current price of about $68, and you might want to consider adding shares of this forever stock to your portfolio.
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A strong portfolio of properties
REITs are great dividend stocks because they have to pay out 90% of their earnings as dividends. Their stocks aren't high gainers, and investors buy them for the passive income. REITs own properties, and Realty operates on a triple net lease model, which means the tenant is responsible for most of property expenses. This is beneficial for the owner, who doesn't need to get involved in the details of the operation, and beneficial for the tenant, who has greater flexibility and a more competitive rental price.
Realty works with a varied group of large, established brands, many of which were open throughout the pandemic as essentials retailers. Its top four tenants are Walgreens, Dollar General, 7-Eleven, and Dollar Tree. Its portfolio is 77% composed of what it calls "Non-discretionary, Low Price Point and/or Service-oriented Retail." This gives it an edge, both in the reliability of its tenants to pay the rent and in its likelihood to remain in a strong position regardless of the economic environment.
It recently completed a merger with fellow REIT, VEREIT, adding more than 3,000 properties to its portfolio, for a total of more than 11,000, and putting it in a very dominant position. This makes it the sixth-largest global REIT. It has more than 1,000 tenants in 60 industries with a 98.8% occupancy rate. It's now working with casino company Wynn Resorts in a sale-leaseback arrangement for growth opportunities in what it calls "prudent diversification." It sees an addressable market of $12 trillion in the U.S. and Europe, of which net lease peers account for less than 1% of the market in the U.S. and 4% of the market in Europe.
NYSE: O
Key Data Points
Revenue increased 27% year over year in 2021 to more than $2 billion, and normalized funds from operations (FFO) per share, which is a metric used by REITs that's similar to earnings per share (adjusted for the VEREIT merger) increased from $0.83 in 2020 to $0.89 in 2021.
A reliable and growing dividend
Realty Income's dividend doesn't offer the highest yield of the REITs. But anything above 4% is very competitive, and its dividend, as well as its business, is as stable as they come. The company issues a monthly dividend, which is also attractive for passive-income seekers, especially retirees. It has issued 620 consecutive dividends and has raised the dividend for 98 consecutive quarters.
The stock trades at 77 times trailing-12-month earnings, which is pricey compared to other REITs. That probably because investors are willing to pay a premium for a dividend stock that's as reliable as Realty Income. The stock price has increased 9% over the past year. Including dividends, it has returned a 15.5% average annual total return since its initial public offering in 1994.
When the market is volatile, and now would certainly qualify, investors often move their funds into rock-solid dividend stocks such as Realty Income. It's a great stock to buy, set, and forget for any time, providing a stable passive income stream.
