Realty Income (O -0.08%) is so committed to its unusual policy of sending its shareholders dividends each month that it trademarked the phrase "The Monthly Dividend Company."
But aside from its track record as a Dividend Aristocrat with 27 consecutive years of payout hikes under its belt, there's another reason that conservative investors will love the stock now: It tends to hold up better than average in down markets. While the S&P 500 index and the Nasdaq Composite are down 5% and 9%, respectively, year to date, Realty Income has slipped just a bit more than 1%.
But is the stock a smart buy now for income investors?
Another respectable year amid the pandemic
Among its real estate investment trust (REIT) peers, Realty Income has unquestionably been a leader in terms of navigating the COVID-19 pandemic over the past two years.
The company posted 2.1% growth in its adjusted funds from operations (AFFO) per share (a crucial measure of REIT profitability) in 2020 during the first year of the pandemic. It was one of just four retail REITs to generate earnings growth in that challenging year. This is particularly impressive considering that many REITs' tenants had to temporarily shutter their stores in 2020 and had to have their rent deferred.
Unsurprisingly, after COVID-19 vaccines and treatments became widely available in 2021, Realty Income was able to achieve much better results.
This gave the company more clarity about its outlook, which explains why it felt comfortable enough to invest a record $6.4 billion in property acquisitions in 2021-- far exceeding its previous record of $3.7 billion in 2019. Even for a massive REIT like Realty Income with an enterprise value of $57.4 billion at the end of 2021, that's a tremendous amount of acquisitions activity.
And most of Realty Income's leases come with built-in rent escalators that organically lift its rent revenue and AFFO per share.
These two factors explain how Realty Income increased its AFFO per share by 5.9% to $3.59 in 2021 -- moderately higher than its 5.1% median annual growth rate since 1995.
Healthy growth looks set to continue
Realty Income had a fantastic year. But is that rate of growth here to stay, or was 2021 an anomaly?
Fortunately, it appears that Realty Income can continue to produce that type of growth steadily for many years to come. This is because the company's current real estate portfolio of more than 11,100 properties accounts for just a fraction of a percent of the $12 trillion commercial real estate market in the U.S. and Europe. With an investment-grade credit rating matched by only six other U.S. REITs, Realty Income also has the access to the capital it will require to keep growing.
For 2022, Realty Income is forecasting an AFFO per share range with $3.91 at its midpoint. That would amount to 8.8% year-over-year growth.
A market-crushing payout
Realty Income's growth prospects are great, and the cherry on top for income investors is its dividend, which at the stock's current price yields 4.2%.
Realty Income's dividend payout ratio was a manageable 79.9% in 2021. This gives the company the capital necessary to continue acquiring properties and boosting its dividend in line with its AFFO growth. With Realty Income's AFFO growth accelerating, there's reason to believe that dividend growth for the foreseeable future could come in higher than the stock's 4.4% compound annual growth rate since 1994.
Quality at a reasonable valuation
Realty Income offers investors a nice balance of income and growth potential. To cap it all off, the stock can be bought at a fair valuation.
Realty Income trades at a price-to-AFFO multiple of 18.1. This is hardly a steep valuation for one of the all-around best REITs, and one that steadily grows at a mid-single-digits clip. And while Realty Income's trailing-12-month dividend yield of 4.1% is moderately lower than its median yield of 4.6% over the last decade, I believe the historical premium is justified. This is because of the stock's growth acceleration in 2021 and the financial projections that suggests that pattern will continue this year.