Investing doesn't have to be complicated. You'll do very well over the years if you can identify high-quality businesses, buy them when the stocks trade at a reasonable price, and hold on to them for as long as the company performs well (ideally, for years).
Realty Income (O -0.17%) checks many boxes for long-term investors. The company is an outstanding dividend stock that will put money in your pocket every month. Additionally, it has a long history of strong business results that could continue building wealth for its shareholders over the coming years.
Read on to find out what makes Realty Income a standout candidate for any portfolio.
In REITs 101, Realty Income is atop the class
A real estate investment trust (REIT) is a particular business structure that deals exclusively in real estate. REITs must pay out at least 90% of their taxable income as dividends in exchange for favorable tax treatment from the government. Congress created REITs decades ago so individual investors could benefit from investing in real estate without needing to buy buildings themselves.
Realty Income is a retail-focused, single-tenant REIT that rents buildings to individual tenants (generally commercial businesses) versus multi-tenant buildings like a mall or shopping complex. It focuses on the retail industry, and its tenant base includes companies like Dollar General, Walgreens, FedEx, and Walmart. These tenants are generally reliable for their rent because they operate businesses that thrive in good and bad economies. Realty Income uses net leases, meaning the tenant is responsible for real estate taxes, maintenance, and insurance.
Since REITs can't retain much of their income, they often issue stock and borrow money to raise the funds to buy more properties and expand their business. It can be a tricky balancing act because management must carefully decide how to balance the two enough to maintain a strong balance sheet and not overly dilute investors.
O Funds from Operations (TTM) data by YCharts
REITs generally refer to funds from operations (FFO), which is the cash flow generated by the company's operations, to discuss their profits. You can see that Realty Income has successfully grown the business; its FFO per share has increased steadily over the past decade. Additionally, Realty Income has an A- investment-grade credit rating from Standard & Poor's. The company is a well-run, blue chip real estate stock.
It's the monthly dividend company
Since REITs must disburse their profits, they are generally good dividend stocks. Realty Income has raised its dividend for 30 consecutive years. That means shareholders have continually enjoyed larger dividends through a pandemic and numerous recessions over the past few decades. The dividend yields 5.2% at its current share price, so income-focused investors should love that.
O FFO Per Share (TTM) data by YCharts
Most importantly, the dividend is safe. Realty Income spends about 72% of its FFO on the dividend, so there's a lot of wiggle room if the business suffers some unexpected setback. And while most companies in the United States pay a quarterly dividend, Realty Income will pay you monthly. It even calls itself the "Monthly Dividend Company."
Shares are a bargain too
Realty Income is a high-quality company. It has grown over time, and you'll get a monthly cash stream from holding the stock. But is the stock a buy? Fortunately, the market could be offering you a pretty good deal today. Shares are down about 20% over the past year.
That alone doesn't make Realty Income a bargain until you add some context. Below is a ratio of Realty Income's share price to its cash from operations. At a ratio of less than 14, the stock is near its lowest valuation in a decade and within shouting distance of when the stock market crashed during COVID-19's outbreak in 2020.
O Price to CFO Per Share (TTM) data by YCharts
Realty Income isn't going to give you explosive investment returns, but it does a little bit of everything. It has a long track record of growth, and analysts believe FFO will grow at a low single-digit rate moving forward. Investors also get a great dividend that is well-funded and can be reinvested to turbo-charge compounding. Its valuation today only underlines the stock's attractiveness.
