Realty Income (O -0.17%) is an incredible dividend stock. The real estate investment trust (REIT) goes far above and beyond other dividend payers. It pays a monthly dividend (instead of quarterly payouts), offers a high yield (5.6% versus 1.5% for the S&P 500), and routinely increases its payment (every quarter for more than a quarter century compared to annual increases).
The REIT should be able to continue providing its investors with more income in the future. That makes it an ideal option for those seeking to generate some passive income.
As predictable as it gets
Realty Income recently raised its dividend for the fifth time this year. While it was a modest pay bump (0.2% above the prior payment level), Realty Income has increased its dividend by 3.2% over the past year. The latest increase was the company's 123rd since coming public in 1994:
Image source: Realty Income.
A few factors have enabled the REIT to deliver such consistent dividend growth. It all starts with its rock-solid foundation. The REIT owns commercial real estate that produces durable income. Realty Income also has a very strong financial position.
Realty Income owns a diversified portfolio of properties (primarily retail, industrial, and gaming) that are resilient to economic downturns and isolated from the pressures of e-commerce. It leases its properties to high-quality tenants under triple-net (NNN) agreements requiring them to cover variable expenses like building insurance, real estate taxes, and maintenance. Those leases often feature annual rental-rate escalation clauses. These features enable it to collect very stable and steadily rising rental income.
The company also has a very solid financial foundation. It's one of only eight REITs with at least two A ratings by the major credit rating agencies. Meanwhile, despite its high-dividend yield, it has a conservative dividend-payout ratio for the sector (75.1% of its adjusted funds from operations (FFO) in the third quarter).
That strong financial foundation gives Realty Income the flexibility to invest in additional income-producing real estate. Those new additions combine with its growing rental income to increase its adjusted FFO per share. That allows the REIT to steadily raise its dividend.
More growth ahead
Realty Income should continue growing in the future. The REIT aims to increase its adjusted FFO per share by 4% to 5% annually over the long term. That's roughly in line with its historical rate (5% annually since 1996).
The company is in a strong position to achieve that goal next year. It agreed to acquire fellow REIT Spirit Realty in a $9.3 billion deal. Realty Income expects the transaction will boost its adjusted FFO per share by more than 2.5% next year. Meanwhile, it will enhance its size, scale, and diversification, expanding its future growth runway.
The REIT has also made a concerted effort to continue diversifying its portfolio, opening new growth pathways. For example, it recently made its first investment in the data-center sector. It's helping fund two facilities under development by data-center REIT Digital Realty that should come online next year. The initial phase will have 16 megawatts (MW) of data-center capacity that the partners could expand to 48 MW in the future.
Data centers are one of several new business verticals the company has added in recent years. It has also expanded into the gaming, vertical farming, and consumer-centric medical sectors, added a credit-investment platform, and made its first investments in Italy and Ireland. These new growth areas add to the company's already sizable investment opportunity. There's an estimated $12 trillion of real estate across the U.S. and Europe suitable for the net-lease structure.
A top-notch income stock
Realty Income is one of the top dividend stocks. It pays a high-yielding monthly dividend that it routinely increases. That steady growth should continue in 2024 and beyond. Because of that, it's a top option for those seeking a steadily rising income stream.
