Dividend stocks have long held a pivotal place in the portfolio of investors who value stability and income. Realty Income (O -0.17%) is considered by many to be among the best of the group, for reasons that include management's commitment to boosting its payouts every year, year after year, through thick and thin.
That "thin" includes the three recessions we've seen so far in the 21st century: the dot-com fallout in 2001, the Great Recession, and the COVID-19 collapse of 2020. The first one was relatively mild, but the second was the most severe since the Great Depression by some measures, and the third was short but quite convulsive.
Retailers were hit particularly hard by the pandemic shutdowns, and many of their publicly held landlords -- in the form of real estate investment trusts (REITs) -- were forced to cut or suspend their dividends. But not Realty Income, owner of more than 13,100 properties, most of them under long-term, net-lease deals with commercial clients.
Image source: Getty Images.
This chart shows how Realty Income has hiked its dividend every year without fail since 2000. The share price, meantime, has taken quite a dip of late, pushing the current yield to about 6.5%, notably higher than its historical average.
Data source: YCharts
A well-oiled dividend machine keeps on rolling
"The Monthly Dividend Company," as Realty Income calls itself, has been in operation for 54 years and has paid 639 straight monthly dividends over that time. And since going public in 1994, the San Diego-based retail REIT has raised that payout 122 times.
That consistency has helped this dividend machine post a compound average annual return of 14.2% since going public, compared to about 10.7% for the S&P 500. Over that time, Realty Income has steadily increased its portfolio, which is anchored by brand-name recession-resistant operators in the convenience, grocery, drug store, and home improvement businesses.
Walgreens and Dollar General are the top two clients, representing only 3.8% each of the REIT's rent roll, while properties in all 50 states and Puerto Rico and a growing presence in Europe provide geographic diversification.
Realty Income shows its Spirit with major acquisitions
Of course, investors expect growth, and growth for a company this big can only come in big gulps. Realty Income managers have used its strong balance sheet to secure favorable financing for some major acquisitions of late.
That's highlighted by the nearly $12 billion all-stock deal for VEREIT, which nearly doubled Realty Income's portfolio when it closed in late 2021. Realty Income also spun off its office holdings into a separate entity, Orion Office REIT, shedding its exposure to that flagging sector.
Realty Income also has spent big bucks of late diversifying into another resilient business: casinos. That includes a $950 million investment for a large piece of the Bellagio in Las Vegas and the $1.7 billion acquisition of Encore Boston Harbor from Wynn Resorts.
While owning casinos seems like a risky business for the owner of retail boxes, these casino operators sign much longer leases than Realty Income's traditional tenants, providing reliable cash flow for decades.
Then on Oct. 30, Realty Income announced a $9.3 billion all-stock deal to buy Dallas-based Spirit Realty Capital that will add nearly 2,100 more single-tenant retail and industrial properties nearly 100% leased to 345 tenants, with a strong presence in Florida and Texas, high-growth states where Realty Income has less of a presence.
Now might be a time to pounce or add
Realty Income says it expects the highly scrutinized Spirit Realty acquisition to boost its adjusted funds from operations (FFO) by about 2.5%. The numbers point to its continued ability to handily cover its dividend, as well. For instance, its latest forecast for 2023 year-end FFO is $3.96 to $4.01 a share, while the payout is currently an annualized $3.07 per share, paid monthly at a current rate of $0.256.
Now also might be a particularly good time to buy some shares of this reliable income stock. The price was already beaten down along with many of its peers, and the market's reaction to the Spirit Realty purchase depressed it further.
Realty Income stock is currently selling for about $48 a share (as of Nov. 1) and analysts on average give it a target price of $63.58. With this company's strong track record and commitment to that dividend growth, I'm confident in the stake I already have in it and plan to add more, whether a long-predicted new recession finally arrives.
