Dividend stocks can be a great way to generate a lifetime of passive income -- if you invest wisely. The key to earning consistent and reliable dividend paydays is investing in companies with a strong track record, stable balance sheet, and that still have long-term growth opportunities.
One stock that checks all of those boxes is real estate investment trust (REIT) Realty Income (O -0.37%). Here's a closer look at this real estate dividend stock and why it's an ideal investment for long-term wealth building.
27 years of raising dividends
Realty Income has been in the net lease business for over 53 years. Specializing primarily in retail properties, the REIT leases a variety of commercial properties to tenants in over 70 industries on long-term leases of 10 years or more.
Since going public in 1994, the REIT has grown its portfolio to over 11,400 properties, making it the largest net lease operator in the world. But its portfolio growth isn't the only impressive thing about Realty Income. The REIT has also managed to raise its dividend every year since 1995, earning it a place as an esteemed Dividend Aristocrat thanks to its 27 years of dividend increases.
Dividend increases have tremendous wealth-building opportunities because as dividends grow, so do returns. For example, if you purchased 100 shares of Realty Income in 2012, you would have earned a 10% annualized return for the past 10 years. A healthy return by most investors' standards, but that's not all you would have received.
Since Realty Income is a dividend REIT you would have benefited from its 63% increase in dividends during that period, earning a total of $25.17 in dividends per share, or around 60% of your original investment.
Stable balance sheet
A stable balance sheet is one of the most important factors in dividend payments. If the company is overleveraged, meaning it doesn't have sufficient income to pay its debt obligations or dividends, eventually dividends will be cut.
Realty Income has a seemingly stable balance sheet with net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.2 times. This is well within the range compared to many of its REIT peers. It also boasts an A credit rating. Its dividend payout ratio is 76%, which should give the company plenty of coverage for its current payouts and room for continued growth.
The company has been issuing new stock to raise capital lately, which has a dilutive effect on share values. It's part ofthe reason its adjusted funds from operations (AFFO) have decreased over the past 10 years. However, I do feel the company is using the money wisely. From 2020 to 2021, Realty Income spent $8.7 billion to acquire roughly 5,000 properties. This helped grow revenue by 71% and has diversified its holdings.
Abundant growth opportunities
Realty Income is very picky about who it leases to, particularly in the retail industry. Roughly 43% of its income comes from investment-grade tenants with strong credit ratings in less vulnerable retail industries. Its long-term leases with a diverse mix of essential retailers like restaurants, convenience stores, and discount stores, along with many others, help deliver consistent income to the company.
Reliability is hugely important to the REIT, but it also knows the benefit of diversification. Its recent acquisitions have helped the company now earn around 14% of its annualized contractual rents from industrial properties and around 2% from other property types. Industrial real estate is one of the fastest-growing and highest-demand real estate industries right now and gives the company exposure to the e-commerce industry. That's a smart long-term move for a company so heavily invested in the retail industry.
Being a global operator also means Realty Income can expand into new countries and markets. Right now less than 10% of its annualized contractual rents come from outside the United States or U.S. territories, but that's likely to grow in the coming years. The REIT has already spent $3.2 billion in 2022 year to date on acquisitions and has identified upwards of $60 billion in new opportunities. There are clearly ample growth opportunities and, given Realty Income's track record of growing its portfolio and dividends, there's reason to believe they should continue.