I love to own income-producing investments because that passive cash flow gives me more financial flexibility. I can use it to grow my passive income, make other investments or purchases, or help cover expenses in an emergency. That extra income helps me stay on track with my financial goals.
One of my favorite passive-income investments is Realty Income (O 0.52%). I can't seem to get enough shares of the real estate investment trust (REIT). Here's why I keep buying shares of a company built to pay its investors stable and growing dividend income.
A great income stream
After sitting on the sidelines for years, I finally added Realty Income to my portfolio in January. I've grown my position almost every month, buying shares seven more times. I now own 40 shares and plan to keep expanding that position in the future.
The main reason I'm steadily buying additional shares of Realty Income is to collect more of its attractive dividend. The REIT pays a monthly dividend that currently yields over 5%. That's well above the 1.7% dividend yield of an S&P 500 index fund.
The company's current monthly dividend payment of $0.248 per share ($2.976 per share annualized) provides me with $9.92 per month of dividend income. While that's not a lot of money right now, I expect the payment to continue growing in the future as I buy more shares and Realty Income increases its dividend.
That dividend payment is on a sound foundation. Realty Income generates very stable rental income, backed by an excellent real estate portfolio. It owns over 11,400 properties leased to tenants in industries resilient to economic downturns and isolated from the pressure of e-commerce. It utilizes long-term net leases (NNN), making the tenant responsible for variable costs like building insurance, maintenance, and real estate taxes. Meanwhile, those leases tend to feature annual rental-rate escalation clauses, which steadily grow the rental income of the REIT's existing portfolio.
Realty Income pays out a conservative amount of this income via the dividend (76.5% of its adjusted funds from operations in the second quarter). That gives it some cushion while allowing it to retain cash to help fund new investments. The REIT also has a top-notch investment-grade balance sheet, giving it the additional financial flexibility to continue expanding its portfolio of income-producing real estate.
Room to continue growing
The other thing I love about Realty Income is its ability to steadily grow its dividend. The REIT has increased its dividend 117 times since its public market listing in 1994, including in the last 100 straight quarters. That easily qualifies the S&P 500 member as a Dividend Aristocrat.
Thanks to its strong financial profile, Realty Income should be able to continue growing its portfolio and dividend in the future. The company purchased $3.2 billion of properties during this-year's first half. That has it on track to make over $6 billion in deals this year. These new investments have enabled Realty Income to increase its dividend by about 5% over the past year.
The company should have no problem continuing to make value-enhancing acquisitions. Realty Income estimates the total addressable global net-lease market is around $12 trillion. That should provide it with ample opportunities to make accretive acquisitions.
Combined with embedded rent growth, those deals should enable Realty Income to grow its dividend at a solid pace. Add in its hefty yield, and it should also be able to produce attractive total returns, making it more than an income-focused investment.
A passive-income cornerstone
Realty Income has delivered steadily growing dividend income to its investors for years. That's the type of company I want to help anchor my passive income, which is why I can't seem to get enough of it in my portfolio. I plan to continue to buy more shares each month as I have the cash to invest until I've built a more meaningful position.
