It's a proven fact that the world is filled with uncertainty. At a moment's notice, a recession could occur, or a war could break out. This is what makes it so important for investors to build their portfolios on a solid foundation to withstand just about anything.
One way to do this is to purchase stocks with decades of dividend growth to their credit. Having boosted its monthly dividend for 29 years straight, Realty Income (O -0.17%) has been put to the test and delivered, time and time again. Here's what makes the stock a trusty pick for investors seeking reliably growing income.
A massive portfolio that's just getting started
With more than 12,400 properties throughout the U.S., Puerto Rico, the United Kingdom, Italy, and Spain, Realty Income is a well-established real estate investment trust (REIT). The company's $42 billion market capitalization ranks it as the sixth largest publicly-traded real estate company on the U.S. market.
How can Realty Income continue to grow and rise up the ranks as a REIT in terms of size? To answer this question, we need to start with what has brought the company to this point since its founding in 1969 with just one Taco Bell location.
Realty Income primarily focuses on sale-leaseback transactions, which involve the REIT purchasing commercial real estate from clients. These properties are then leased back to the same sellers for an average lease term of nearly 10 years with annual rent hikes built into the contract. The draw for prospective clients is that they can harness the equity in their properties, which can be used to grow business operations, repay debt, or for other things.
These mutually beneficial business arrangements between Realty Income and its tenants have paid off in a major way for the REIT. The company's adjusted funds from operations (AFFO) per share have grown by 5% annually dating back to 1995, with an acceleration over the last decade.
As big as Realty Income has become, the company isn't done growing. This is because the overall net lease commercial real estate market within the United States and Europe is estimated at $13 trillion. That means the company can drive growth while also sticking to its quality-first approach toward property acquisitions by acquiring around 10% of its sourced volume (plus or minus a few percent).
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The dividend is easily covered
Compared to the S&P 500 index's 1.5% dividend yield, income investors will probably find Realty Income's 5.1% yield to be exceptionally attractive. And the good news for yield-oriented investors is that the company's monthly dividend looks to be quite safe.
Using the midpoint of Realty Income's AFFO per share guidance for 2023, the dividend payout ratio is poised to clock in at around 77% for this year. Along with the issuance of debt, this should give the company the capital needed to further strengthen its property portfolio in the years ahead. That's why I anticipate annual dividend growth close to the 4.4% compound annual growth rate that it has delivered since 1994, which is a nice mix of income and growth potential.
Realty Income's valuation makes it a buy
Realty Income is a fundamentally solid business. And investors can pick up shares in the stock for a forward price to AFFO multiple of approximately 15. Adding to the case that Realty Income stock is a buy for dividend growth investors, shares are trading at a price-to-book (P/B) ratio of just 1.4. That's near the 10-year low P/B ratio of 1.3 and considerably less than the 10-year median P/B ratio of 2.1.
