Realty Income (O -0.17%) knows exactly the type of investor that buys its shares. It's why the real estate investment trust (REIT) trademarked the nickname "The Monthly Dividend Company." But investors need to understand the trade-offs they are making when they buy this well-respected dividend stock. Here's a quick look at the pros and cons of Realty Income.
First the good stuff about Realty Income
Realty Income has increased its dividend annually for 29 consecutive years. Within that streak is another one: The REIT has also increased its quarterly dividend for more than 100 consecutive quarters. Add these facts to the monthly dividend frequency, and buying Realty Income is very close to replacing a paycheck -- with regular raises! Retired investors looking to supplement Social Security with dividend stocks will probably find that very appealing.
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The company's business model, meanwhile, is centered around consistency. For starters, it is a net-lease REIT. That means that it owns single-tenant properties where the tenants are responsible for most property-level costs. That keeps Realty Income's expenses low, and removes the complexity of property management from the mix, allowing the REIT to focus more time on things like acquisitions. Also, around 75% of rents come from retail properties, which tend to be fairly generic and easy to buy, sell, and rerelease, if needed.
It is noteworthy too that Realty Income is a roughly $40 billion market cap net-lease giant, multiple times larger than its closest peers. That gives it scale advantages when it comes to raising capital, and when it comes to buying larger property portfolios. The REIT has an investment-grade-rated balance sheet, too, which signals financial strength and means it often receives advantageous rates when issuing debt.
If you are looking for a reliable dividend check from a financially strong and industry-leading company, Realty Income should be on your shortlist.
Now the bad news about Realty Income
The problem with all of this is that investors are well aware of the REIT's success, and it is generally afforded a premium relative to its peers. So while the 5.2% dividend yield isn't unattractive, and is actually higher than the average REIT's 4.4%, there are higher yields available in the net-lease space from still highly respected REITs. A good example would be W.P. Carey (WPC -1.70%), which has a 6.4% yield today. If you are looking to maximize the income you generate, there are better choices out there.
O Dividend Yield data by YCharts
Then there's Realty Income's dividend growth, which has averaged around 4.4% over the past 29 years. That's not a bad number, and it should keep the buying power of your dividends slightly ahead of the historical rate of inflation growth. But there are other dividend stocks with much higher dividend growth rates. If dividend growth is your focus, Realty Income won't be the right answer, either.
The dividend growth rate also hints at another important factor. While Realty Income is an industry giant, and gets advantages from that, there are negatives associated with being so big. Specifically, this REIT has to ink a lot of transactions to grow its portfolio of over 13,000 properties. A smaller landlord wouldn't need to source as many deals to move the top and bottom lines. Realty Income is best viewed as a tortoise.
What trade-off do you want to make?
Ultimately, when considering Realty Income, investors need to decide whether the cost justifies the benefits. For many the answer will be a hard no, which is perfectly fine. But for conservative income investors that care greatly about collecting reliable dividend checks, accepting a lower yield from slow-growing Realty Income might be the perfect fit.
