Realty Income (O 0.24%) proves that slow and steady does win the race. The real estate investment trust (REIT) has never grown that fast. However, it has steadily grown each year. Since its public market listing in 1994, the company has increased its adjusted funds from operations (FFO) per share at a relatively modest 5% compound annual rate. Meanwhile, the dividend has expanded at a slightly slower 4.4% compound annual rate. Add in the growing dividend income, and the REIT has delivered an impressive 14.6% compound average annual return.
Meanwhile, the return is even higher for investors who reinvest their dividends into buying more shares:
Image source: Realty Income Investment Factsheet.
As that graph demonstrates, a $100 investment in the REIT around its public listing has grown into nearly $4,000 over the last couple of decades. While that past performance is no guarantee of future success, there's a decent chance Realty Income continues to grow relatively modest investments into much bigger sums over time. Here's why.
The power of dividend growth
Companies that pay dividends have outperformed their stingier peers by 2-to-1 over the past 50 years, according to data from Ned Davis Research and Hartford Funds (a 9.6% average annual return, versus 4.8%). Meanwhile, companies that steadily grow their dividends have historically delivered an even higher average total return of 10.7%, outpacing the S&P 500's 8.2% average annual total return.
That outperformance really adds up over the long term. For example, a $100 investment in a dividend growth stock would have grown into more than $14,400 over the past 50 years. That same $100 investment in an S&P 500 equal-weight index fund would have grown to about $4,745. Meanwhile, a $100 investment in a non-dividend payer would have only grown to around $990.
Realty Income certainly qualifies as a dividend grower. The REIT has increased its dividend 119 times since its public market listing in 1994, including in each of the past 101 straight quarters.
No end in sight
Realty Income should have no problem continuing to push its payout higher. Several factors drive that belief.
The REIT focuses on investing in real estate that generates steady rental income. It owns freestanding single-tenant properties net leased to tenants in 84 industries. That lease structure makes the tenant responsible for building insurance, maintenance, and real estate taxes, eliminating income variability. Meanwhile, most of its leases feature annual rental rate escalation clauses that either rise at a fixed rate or one tied to inflation. These factors enable the company to earn steadily rising rental income from its existing properties.
Meanwhile, Realty Income has one of the strongest financial profiles in the REIT sector. It has a relatively low dividend payout ratio -- about 75% of its adjusted funds from operations. That gives it a cushion and allows the company to retain some earnings to help fund new real estate investments. In addition, Realty Income has one of the highest credit ratings in the REIT sector. That enables it to borrow money at low rates to fund new acquisitions.
The company has an excellent track record of making accretive acquisitions. It routinely sources tens of billions of dollars of annual investment opportunities. However, it's very selective, closing less than 10% of the deals it sources. Realty Income can steadily grow its income per share by only acquiring properties that meet its strict criteria. Rising rental rates at its existing portfolio further boost its cash flow per share. That allows it to keep increasing the dividend.
With a top-notch financial profile and a vast opportunity set -- there's an estimated $13 trillion of owner-occupied real estate across the U.S. and Europe -- Realty Income has ample fuel to continue growing its portfolio and dividend.
A great long-term investment
Realty Income has a long history of enriching investors. That makes it a great stock to buy, even if you only have a little bit of money to invest. The company's ability to steadily grow its dividend should give it the power to continue producing meaningful returns, especially for those who reinvest their dividends into buying more shares to help compound their gains.
