Real estate is an investment vehicle that has minted many millionaires and billionaires throughout history. That's especially true for real estate that is leased out to businesses (i.e., commercial real estate).
But commercial real estate was largely a playground reserved for the ultra-wealthy. That is, until the law that made real estate investment trusts (REITs) in 1960s. Now, investors who have as little as a few dollars in their brokerage account can become landlords with a click of the buy button.
Few if any REITs are as well known to investors as Realty Income (O -0.74%). Here's why the stock is among the largest holdings (REITs and non-REITs alike) in my mostly dividend stock portfolio.
A dominant business with decades of growth left
Realty Income boasts a portfolio of over 11,700 properties throughout the U.S. and Europe. The company's $41 billion market capitalization positions it as the seventh-largest REIT on the planet.
As a triple-net-lease REIT, Realty Income purchases properties and leases them back to tenants in sale-leaseback transactions. The company's tenants typically then use these funds to expand their businesses and/or repay debt. Realty Income's leases with tenants are generally around 10 to 11 years in length and include annual lease escalators, which provide the company with reliable and growing rent revenue. This explains how the company has been able to deliver 5.1% annual adjusted funds from operations (AFFO) per-share growth since 1996.
And as large as Realty Income has become over the last 50-plus years, the company's growth seems to be just getting started. This is because the total addressable market of commercial real estate in the United States and Europe is a combined $13 trillion. Realty Income can continue to be selective with an acquisition rate of less than 10% of the investment opportunities that it sources and have plenty of room for future growth.
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The market-crushing dividend is safe
Realty Income's 4.5% dividend yield is nearly triple the S&P 500 index's 1.7% yield. While the company's dividend growth isn't sky high, it does offer a nice mix of safe starting income and future income.
This is supported by the fact that the dividend payout ratio will be 76% in 2022. That leaves Realty Income with enough capital to carry out future property acquisitions. Such a manageable payout ratio also builds a margin of safety into the dividend in the event of a temporary decline in AFFO per share. This is why I am confident that Realty Income will build on its 28-year dividend growth streak in the future.
A wonderful business at a fair price
With the S&P 500 index down 19% in 2022, last year was a trying one for the stock market. But Realty Income fell just 7% in 2022.
Investors seeking a stable performer in uncertain times would be well suited to consider buying Realty Income now. The stock is trading at a price-to-AFFO-per-share ratio of just 16.9. And if that wasn't enough, Realty Income's trailing-12-month (TTM) dividend yield of 4.5% is in line with the 10-year median TTM dividend yield of 4.5%. These are hardly unreasonable valuations for a company with nearly three full decades of dividend growth to its name.
