Realty Income (O 0.17%) is a bellwether name in the real estate investment trust (REIT) space. It has historically been afforded a premium price relative to its closest peers. That premium has been earned many times over at this point, which is why I intend to keep this name in my portfolio through bull and bear markets. Here's a closer look at why.
A strong foundation
The core of Realty Income's business is the net lease structure. This means that it owns single-tenant properties and its tenants are responsible for most of the operating costs of the assets they occupy. While any single property is high-risk, given that there's only one tenant, across a large portfolio the net lease approach is very low-risk. Realty Income's portfolio is huge, at over 11,000 properties. On top of that, the REIT has an investment-grade-rated balance sheet, so it is fiscally conservative as well.
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The proof is in the dividend, however, with Realty Income on the Dividend Aristocrat list. In total, it has increased its dividend for 27 years and counting. Within that streak, meanwhile, this monthly pay REIT has a string of 98 quarterly increases. To be fair, the increases tend to be modest in the low- to mid-single digits, but even small increases add up over time.
Notably, those dividend hikes have continued through multiple recessions and market corrections. Since I focus on generating a reliable stream of passive income, Realty Income is a perfect fit for me.
My mistaken valuation view
The thing is, I didn't always think about Realty Income the way I do today. I owned it years ago and then sold it when the stock price appreciated and the dividend yield dropped from around 10% to something in the 4% range, which is where it is today (about 4.3%). I sold because I was anchored to the 10% yield at which I bought Realty Income. But that elevated yield occurred during a market downturn.
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Key Data Points
The difference that I see today is that access to capital is fundamental to the REIT model. REITs pay large dividends to avoid corporate-level taxation. But pushing out 90% of their taxable income, the required level to remain a REIT, leaves them with little cash for growth investments. That means they need to access capital markets by selling bonds and stock.
Having an investment-grade-rated balance sheet gives Realty Income access to inexpensive debt. Having a low yield and thus a premium stock price -- since yield and price move in opposite directions -- gives the REIT access to cheap equity capital. Together, that means Realty Income can profitably invest in new property in just about any market environment. Moreover, given its size, it can take on large deals that most of its peers simply couldn't manage, such as its acquisition of peer VEREIT or the recent $1.7 billion purchase of a casino in Massachusetts.
A sell-off could be a buying opportunity
When I step back from Realty Income today and think about owning it for the growth it can achieve over time, I'm not sure I ever want to sell it. It simply has too many advantages over its peers, including trading at a premium price. In fact, if the stock were to sell off along with the broader market, it would more likely lead me to buy more shares than to sell this reliable dividend grower. For most dividend investors, Realty Income will likely be a solid buy-and-hold dividend-focused investment that will help you weather the market's inevitable ups and downs.
