Investors often view stock performance through a myopic lens, focusing only on stock price appreciation. That's fine if a company doesn't pay dividends, but dividend-paying stock performance should really be considered with a broader metric: total return. Realty Income (O +1.32%) helps show why this is so important and why you still might want to add this boring real estate investment trust (REIT) to your portfolio.
Always buying more
Dividends are a powerful tool, offering investors a way to value stocks (relative dividend yield) and a way to compound returns (dividend reinvestment). The latter point is the one that's so important to consider if you are a long-term investor. One frequent piece of advice is to dollar-cost average by investing on a regular basis over time. If you reinvest your dividends you are, basically, doing just that. Only you don't have to come up with the cash; the company you've invested in does that for you. The impact can be huge.
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REIT Realty Income, for example, has turned a $10,000 investment at the start of 2000 into $228,000 today. That includes dividend reinvestment. Pull out the reinvested dividends and the price appreciation alone has grown that $10,000 into "only" $61,000 or so. That's a massive difference! Putting those numbers into percentages: The stock's price has increased a bit over 500%. With dividend reinvestment, Realty Income's value has grown by north of 2,100%.
Here's where it gets really interesting. Over the same span, the S&P 500 Index has turned $10,000 into around $25,000 without dividend reinvestment. With dividend reinvestment, that figure grows to $38,000. Percentage-wise, that translates to 150% growth without the dividend reinvested and 280% with the dividend reinvested. Those numbers are nowhere near as good as the ones Realty Income put up.
One of the biggest differences between the S&P 500 Index and Realty Income is that Realty Income has always had a higher dividend yield (materially higher at some points). That means more money being put back in to buy new shares, compounding returns over time.
O Dividend Yield data by YCharts.
Dividends by design
To be fair here, REITs were created to pass income derived from property ownership on to investors. Realty Income, specifically, owns single-tenant retail and industrial properties that generate reliable cash flows. To avoid corporate-level taxation, REITs pass at least 90% of earnings, often more, on to shareholders as dividends. So, income is the big attraction for REITs, which isn't quite as true for the S&P 500 Index, a list of companies that spans across industries and that contains both dividend payers and nondividend payers. Today, for example, Realty Income's 4.8% dividend yield is well more than twice that of the S&P 500 Index. Which is actually one reason why it still might make sense for long-term investors to buy into this dividend compounding machine, assuming you reinvest those payments.
But that's not the only reason. Roughly $38 billion market cap Realty Income is one of the largest players in the net lease niche. Net lease means that the tenant is responsible for most of the property-level costs of an asset. With a large enough portfolio, this is a very low-risk way to invest in property. Realty Income owns over 11,000 buildings. It also has a fairly diversified portfolio, with around 80% of rent coming from retail properties and the rest from industrial and "other" assets. About 10% of total rent comes from Europe. There are more diversified options out there, but Realty Income's breakdown is fairly desirable.
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Key Data Points
Then there's the dividend, which has been increased annually for 27 consecutive years. That makes Realty Income a Dividend Aristocrat. On top of that, the dividend is paid monthly, which increases the amount of times you dividend reinvest.
And Realty Income's strong business has afforded it investment-grade credit ratings and an industry-leading valuation. These factors mean it has a low cost of capital, which helps support acquisition-driven growth. Add that to the REIT's size and it can do deals that peers couldn't manage. This should help to ensure that Realty Income remains a top performer over the long term. In other words, there's no reason to think this dividend reinvestment machine is going to slow down anytime soon.
A good starting point
To be fair, Realty Income started the comparison period above with a double- digit dividend yield. That gave it a huge leg up when it comes to dividend reinvestment. However, given the still-material difference between the yield of the S&P 500 and Realty Income, and the many advantages the REIT has today versus its smaller peers, it is still an attractive name to consider for long-term investors. That includes both income-focused investors and those who aren't usually focused on dividends.
