Too many investors see Wall Street as a way to get rich quick, with things like meme stocks and skyrocketing IPOs garnering way more attention than they deserve. If only it were that easy -- but the downside of betting big on risky investments is losing big. It is far better to have a portfolio with a lot of different risks in it so you can safely build your wealth into the millionaire category over time. Realty Income (O 0.64%) could be a key part of that equation.
Spreading your bets around
If you had 100% knowledge that a stock was going to go up materially then it would make sense to invest 100% of your portfolio in that stock. But there are no crystal balls on Wall Street -- you have to weigh the risk of a stock going up against the risk that it will go down. That's why betting it all on a single investment is not something that most investors should do. It is far better to diversify your portfolio by spreading your bets across, say, 25 or so stocks.
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Here's the thing: Diversification doesn't mean you have to own a portfolio full of safety-first type investments. In fact, you should have some riskier options in the mix along with some lower risk names. It is the steadier businesses that allow you to take on the greater risks. Realty Income is exactly the type of lower-risk stock that can provide you with the comfort to take on more risk.
Slow and steady wins the race
Realty Income owns a massive portfolio of around 11,000 single net-lease properties. That means that it owns the assets, but its tenants are responsible for most of the operating costs of the properties they occupy. Any single property is a higher risk because there's only one tenant. With many properties in a portfolio under this model like Realty Income does, though, the portfolio risk from any one property being vacant is mitigated. Today a notable benefit of this model is that the most severe impact from inflation is being felt by tenants because they have to pay rising maintenance costs -- Realty Income doesn't.
The REIT's portfolio is heavily weighted toward retail, which makes up around 80% of rents. These types of properties are fairly generic, so they are easy to release or sell should a tenant issue arise. The rest of the portfolio falls into "non-retail", which is largely industrial and warehouse assets, but also includes a vineyard and very soon a casino. Nearly 10% of the company's rents come from Europe, adding a touch of geographic diversification to the mix.
Meanwhile, Realty Income pays a monthly dividend that has been increased annually for over 25 consecutive years, making it a Dividend Aristocrat. The dividend has grown slowly, at a roughly 4.4% annualized rate since 1994. That's below the current level of inflation, but is actually higher than the long-term average for inflation, which is closer to 3%. Realty Income is the epitome of slow and steady. And yet, it still has some great long-term performance numbers.
For example, over the past 20 years, Realty Income's stock has advanced just shy of 350%. That compares to a gain of nearly 360% for the S&P 500 Index, which is pretty good relative performance for a boring investment. But wait, there's more! A huge part of the story for Realty Income is its dividend, so total return, which includes the reinvestment of dividends, is a more telling indicator of long-term performance. The REIT's total return over the past two decades is around 1,200% compared to a total return of roughly 575% for the S&P 500 Index. Slow and steady suddenly looks a lot more enticing.
A piece of the millionaire story
To be fair, conservative investors know how attractive the REIT is and often afford it a premium price. However, that just means that Realty Income has a lower cost of capital than its peers, giving it a leg up when it buys property. So while the roughly 4% dividend yield is lower than you can get elsewhere in the REIT sector, it might just be worth paying up for a quality dividend payer that has proven it can be a rock even during some of the worst market storms. That, in turn, means you can more easily own aggressive stocks that, in combination with Realty Income, can get you to a seven-figure net worth.
