This Unstoppable 5.4%-Yielding Dividend Stock Is Making a Low-Risk Wager With a Big Payoff

Reality Income (O -0.17%) recently unveiled one of its largest investments in a single property. The REIT is investing $950 million in The Bellagio Las Vegas in a deal with Blackstone's non-traded REIT, Blackstone Real Estate Income Trust (BREIT). The two-part investment should generate a high return for the company.

Here's a look at the deal, which should support Realty Income's ability to continue increasing its monthly dividend, which at the current share price yields about 5.4%.  

A meaningful payoff

Realty Income is making a $950 million investment into a joint venture with Blackston's BREIT that will own a 95% interest in the real estate assets of The Bellagio Las Vegas. Casino operator MGM Resorts International will retain the remaining 5% stake in the property. The two-part investment will see Realty Income invest $300 million of common equity into the joint venture, giving it a 21.9% indirect interest in the property, with BREIT retaining a 73.1% interest. In addition, Reality Income will make a $650 million preferred equity investment in the joint venture. The deal values The Bellagio Las Vegas' real estate assets at $5.1 billion. 

The iconic 77-acre property has an existing 30-year triple net lease (NNN) with MGM with 26 years remaining on it. That lease will supply Realty Income with steadily rising rental income on its $300 million equity investment. Rents will escalate by 2% per year for the next six years. After that, the rents will increase by the greater of 2% or the Consumer Price Index (CPI), capped at 3% in years 11 through 20, and 4% in years 21 through 30. Meanwhile, the $650 million preferred equity investment will generate stable interest income at a yield of 8.1%.

The large-scale investment will provide the REIT with meaningful incremental income to support its growing dividend. The company estimates that the combined income yield on its $950 million investment will be around 7.7%, implying it should produce over $73 million of annual income that should rise as rent growth increases the income from its common equity investment. Those dual growth drivers should allow Reality Income to continue its unstoppable streak of dividend growth, currently up to 103 consecutive quarters. 

Expanding its ability to increase the dividend

Realty Income's deal with Blackstone showcases its growing ability to expand. It's another example of the REIT's ability to complete large-scale transactions. This deal is the company's third investment of more than $900 million with a single client in the last year. Other notable large-scale investments included a $1.5 billion sale-leaseback transaction with EG Group for 415 single-tenant convenience store properties and up to $1 billion to fund vertical farm developments with Plenty. 

It's also the company's second deal in the gaming sector as it diversifies its retail-heavy portfolio. Realty Income entered that industry in late 2022 when it completed its $1.7 billion sale-leaseback transaction of the land and real estate assets of the Encore Boston Harbor Resort and Casino from Wynn Resorts. Gaming will become an even larger contributor to the company's income stream with the Bellagio investment. 

Finally, this transaction represents Realty Income's first investment through its credit investment platform. The company sees credit investments like preferred equity as a natural extension of its business because they generate steady income. They also enable the company to provide additional value to its clients. Given the current conditions in the credit market, as banks pull back on lending and interest rates rise, the company could see more opportunities to put capital to work in credit investments. Further, this platform could allow it to diversify into additional property types that aren't suitable for the net lease structure, like multitenant properties. 

The unstoppable dividend growth should continue

Realty Income's Bellagio investment is a needle-mover for the REIT. It should earn a high return from a relatively low-risk investment. That supports the company's ability to continue increasing its attractive dividend.

The deal also showcases the company's ability to expand its opportunity set. It's part of a growing list of larger transactions, the second investment in a new property vertical, and the first deal from its new credit investment platform. With an increasing number of ways to grow, Realty Income's dividend should remain unstoppable.