Real estate investment trusts, or REITs, are generally not thought of as the most exciting businesses, and to be fair, they aren't. Consider Realty Income (O -0.17%), one of the largest and oldest REITs in the market. The company owns a portfolio of single-tenant properties that it leases out to tenants on long-term, triple-net leases. Not exactly in the same league excitement-wise as a cloud infrastructure or AI company, is it?

However, it's a common misconception that a "boring" business can't produce market-beating returns for investors over the long run. Realty Income has done it and with far less volatility than the typical S&P 500 or Nasdaq stock.

Realty Income's business model

If you aren't familiar, here's the quick explanation of Realty Income's business. The company owns a portfolio of more than 13,100 commercial properties, most of which are occupied by a single tenant. About three-quarters of the company's rental income comes from retail tenants, and there are also industrial, agricultural, and gaming properties in the REIT's portfolio (Realty Income just purchased a stake in the Bellagio in Las Vegas, for example). Its properties are located in all 50 states as well as in several European countries.

Tenants sign long-term, triple-net leases that require the tenant to cover taxes, insurance, and maintenance, and typically have annual rent increases built in. And virtually all of the tenants fall into one of four categories:

  • Non-discretionary: Retailers that sell things people need. For example, grocery stores make up about 10% of the portfolio.
  • Discount-oriented: Retailers that sell things at low prices tend to perform better in recessions and are less vulnerable to e-commerce competition. Dollar General (NYSE: DG), Realty Income's largest tenant, is a good example.
  • Service-based: Retailers that sell a service, not a physical product. Businesses like restaurants and fitness clubs aren't vulnerable to e-commerce headwinds.
  • Non-retail: FedEx (NYSE: FDX), one of Realty Income's top tenants, is a rather recession-proof business that would do better if e-commerce continues to grow.

The bottom line is that Realty Income's portfolio and lease structure are designed to provide year after year of worry-free, growing income.

Performance and dividends

You might think this business sounds boring. And I get it. I've been buying shares of Realty Income for over a decade now. It certainly isn't because its business is particularly exciting or innovative. But the proof is in the performance.

For one thing, the stock has been an income investor's dream. It has a 5.4% dividend yield at the current price and recently declared its 638th consecutive monthly dividend, dating back to years before it was a publicly traded REIT. It has increased its payout for 103 consecutive quarters, and there's no reason to believe this streak is in danger.

But it isn't just about income. Thanks to smart capital allocation by management and solid appreciation of its real estate assets, Realty Income has delivered 14.2% annualized total returns since its 1994 NYSE listing. Consider this:

  • Over the past 25 years, Realty Income has delivered a 2,100% total return for its investors, meaning that a $10,000 investment would now be worth about $220,000 after a quarter century.
  • In the same period, the Nasdaq, as measured by the performance of the Invesco QQQ Trust (QQQ 1.54%) index fund, generated a 755% total return. And if you're curious, the S&P 500 benchmark's total return in that period was 454%.

Performance without the stress

Not only has Realty Income's performance been fantastic, but it has done it while allowing its investors to sleep well at night. Since listing on the NYSE in 1994, Realty Income's beta (a measure of stock volatility) has been half of the average S&P 500 stock. In a nutshell, Realty Income is boring in the best possible ways but exciting where it matters to long-term investors.