Realty Income (O -0.17%) is one of the most watched real estate investment trusts (REITs) on Wall Street. If you are looking for a reliable dividend stock, now could be the best time in roughly a decade to jump aboard this industry-leading stock. Here are five good reasons why.
1. Realty Income's yield is historically high
There's no point in mincing words -- if you are a dividend investor you likely care a lot about a stock's dividend yield. Right now Realty Income's yield is 5.5% or so. That's attractive on an absolute basis, given that the S&P 500 Index is only yielding around 1.6% and the average REIT roughly 4.9%, using Vanguard Real Estate ETF as a proxy.
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But the real story here is that Realty Income's yield is high relative to its own history, as it is toward the high end of the REIT's yield range over the past decade. The yield was higher in the early days of the coronavirus pandemic (just over 6%), so it wouldn't be fair to say now is the best time to buy it in the past decade. But Realty Income's yield is still very, very attractive from a historical perspective.
2. Realty Income has been a reliable dividend stock
Backing Realty Income's historically high yield is a streak of 29 consecutive annual dividend increases. Within that streak, however, is another. The dividend has been increased for 109 consecutive quarters, which is roughly 27 years. Dividend investors will likely find both of those streaks quite attractive.
But there's another little nuance. Realty Income is a monthly-pay dividend stock. So owning it is very much like replacing a paycheck, only you get regular quarterly raises. It would be hard for a retired dividend investor to complain about that, given how much easier it can be to budget with a steadily growing monthly dividend in the mix.
3. Realty Income has a solid foundation
The dividend here is built atop a REIT with a solid foundation.
For starters, it is investment-grade rated, so it has the financial strength to weather difficult times. Second, the portfolio is gigantic at more than 13,000 properties, so no single asset is all that important to the top and bottom line.
Third, it is increasingly geographically diversified as it reaches further and further into the European market. Fourth, its adjusted funds from operations (FFO) payout ratio is a reasonable 75% or so. There's no particular reason to worry about the dividend being cut anytime soon.
4. Realty Income is slow, but still fast enough
The one drawback with Realty Income is likely to be its slow pace of dividend growth. Over the past 29 years, the average annualized dividend increase was 4.3%. But you have to compare that to inflation to really understand the value. While inflation has been high of late, the historical rate of inflation growth is something closer to 3% a year.
So while slow and steady has been the pace, Realty Income's tortoise-like approach has still managed to grow the buying power of its dividend over time. Perhaps you'll want to layer some higher-growing dividend stocks on top of Realty Income, but it can still provide a solid foundation to a diversified portfolio.
5. Realty Income's size comes with advantages
As noted, Realty Income has a huge portfolio. That doesn't do justice to its size, given that its nearly-$40 billion market cap is roughly three times the size of its next closest peer. This means that Realty Income's stock is more liquid and, keeping in mind the investment-grade rating, the company will likely have easier access to debt markets. Both help to keep Realty Income's cost of capital low in a business where cost of capital is a key differentiator.
On top of that, Realty Income is big enough to do deals that peers couldn't even consider, including consolidating the net-lease industry. It has already completed the purchase of VEREIT, with a deal to buy Spirit Realty on tap to be consummated in 2024. It takes a lot to move the needle at Realty Income, but it has the wherewithal to do just that.
Realty Income is a core REIT holding
Like all stocks, Realty Income has its flaws, slow growth being the most prominent. But it can be a core holding for conservative income investors, providing a foundation on which higher dividend growth stocks are layered.
And with the yield historically high, now is a great time to add it to your portfolio if you don't already own it. If you do own it, you might want to consider buying more.
