Are you old enough to remember Woolworth? If not, you are definitely old enough to remember Bed Bath & Beyond. Neither of these once-dominant retailers exists anymore (at least not as they once did). But there's one thing about the retail business that doesn't change: location, location, location. Here's why you might want to buy Realty Income (O +0.27%) over a retailer.
It's hard to pick retail winners
If you take even a cursory look at the retail sector, you'll find that it's filled with brands that are "up and coming" and brands that have come and gone. There's a lot in between the two extremes. In the come-and-gone camp would be Woolworth, Sears, and Kmart. All were once dominant names that fell on hard times. The in-between space includes companies like Victoria's Secret, which was once the leading lingerie retailer but has been suffering as competitors like Arie, owned by American Eagle Outfitters, have gained share.
Image source: Getty Images.
That's a very short list of high-profile names. There are a host of less-well-known companies that have come and gone, like Tuesday Morning and HH Gregg. To be fair, some brands, including a few mentioned above, stop operating physical stores and end up being revived as online-only retailers. But that's often after brands are bought out of bankruptcy. In some cases brands live on, but end up being sold as products through other retailers, such as Sharper Image. Regardless of how it happens, fickle customers cycle through retailers pretty quickly.
Even sticking to giants, like Sears once was, isn't a guarantee of success in the swiftly changing retail sector. But there's one thing that tends to remain even after a retailer has left the building: the building.
That's what real estate investment trust (REIT) Realty Income owns. Roughly 75% of its rents come from single-tenant retail properties. It's a good way to benefit from the retail sector without having to pick a retail winner. In fact, Realty Income takes on the hard work of vetting retailers to make sure they can pay their rent.
Realty Income has lots of retailers in the mix
What's nice here is that a good retail location can be released to a new retailer if the old one runs into trouble. While not all properties are great, with a portfolio of 13,100 buildings, no single property is too big a deal for Realty Income. Notably, it has a very broad list of retail categories in the portfolio, including convenience, grocery, dollar stores, general merchandise, automotive service, health and fitness, restaurants (casual dining and quick service), drug stores, and home improvement, among others.
NYSE: O
Key Data Points
You probably know many of the big names in its portfolio, too. It includes icons like Walmart, FedEx, Home Depot, Dollar Tree, Walgreens, and 7-Eleven. There are also up-and-coming brands like Tractor Supply. Basically, Realty Income is a quick and easy way to generate reliable income from a portfolio of retail properties while allowing you to sidestep the trouble of trying to pick a winning retail concept.
To put a number on the passive income side of the equation here, Realty Income has increased its dividend each year for 29 consecutive years. The compound annual growth rate of the dividend over that span was 4.4%, which isn't huge but is more than enough to keep up with the historical rate of inflation. It pretty clearly has a solid business model if it has managed a streak like that.
To further highlight the quality of Realty Income's underlying model, consider that it has, on average, released expiring leases at 100% or more of the expiring lease rate since 2015. In other words, retailers want to be in Realty Income's properties and are willing to pay up for the privilege.
No silver bullet, but pretty good just the same
Not every property Realty Income owns is a great one. And it sometimes has tenants in the mix that go belly-up. But given the size of the portfolio, these negatives have little effect on the REIT's overall business. That's a dramatic difference from the total loss you could experience if you decided to invest in a retailer that ended up going bankrupt. And you get to collect Realty Income's generous 6.1% dividend yield along the way.
If you are looking at retailers, step back and consider a landlord like Realty Income. You might find it's a better risk/reward option, particularly if you are trying to build a reliable passive income stream.
