There are a lot of great reasons to invest in Realty Income (O -2.47%), a real estate investment trust (REIT) that specializes in standalone locations for businesses like grocery stores, convenience stores, and drugstores.
First, it's been a great dividend stock to own throughout its history. The stock currently offers a 5.3% dividend yield, and it has raised its dividend for the past 104 quarters in a row.
Realty Income is also unique because it pays a dividend every month, making it a great income stock for retirees and others who rely on dividend income to pay monthly bills.
The business is known for its stability and long track record of reliable growth, but there's another reason why Realty Income is such a good passive income stock to own.
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Realty's Income hidden asset
In addition to paying a monthly dividend, what differentiates Realty Income from most other REITs is that the company operates as a triple net lease landlord, meaning that it charges tenants for maintenance, property taxes, and insurance instead of footing those costs itself.
This helps protect Realty from unexpected jumps in those expenses, which tend to be the biggest property costs after the mortgage. Operating as a triple net lease landlord therefore helps Realty Income ensure a stable and predictable cash flow for itself and its investors. For tenants, the net lease model offers more freedom to make alterations or customize a space to suit the needs of the business.
There's no exact formula for estimating the value of a triple net lease, but industry experts estimate it to be worth approximately $3 per square foot on average, though it can vary substantially depending on the location, the property, and the business.
As of the end of the third quarter, Realty Income had 262.6 million square feet of leasable space, which equals approximately $800 million in annual revenue assuming $3/square foot.
That revenue is represented in its annual base rent, which is currently $3.9 billion, meaning about 20% comes from the three net lease components based on the $3/square foot benchmark.
Above-average returns and below-average risk
Realty Income's triple-net-lease strategy is a key reason for the stock's long-term success as is its focus on non-discretionary, low-price point and service-oriented businesses.
The company owns more than 13,000 properties, and among its biggest tenants are Walgreens, Dollar General, Dollar Tree/Family Dollar, and 7-Eleven.
Since its IPO in 1994, Realty Income has a total return compound annual growth rate of 13.4%, which compares with roughly 9% for the S&P 500. Realty Income has also achieved that performance with less risk than the broad market as it has a beta of 0.5, meaning it's only half as volatile as the S&P 500. In fact, the company's total shareholder return since 1994 has had the fifth-lowest downside of all S&P 500 constituents.
More growth is in store
While Realty Income is known more as a dividend stock than a growth stock, the company has an attractive growth opportunity as it sees a $12 trillion global net lease addressable market and it sourced $95 billion in acquisition opportunities in 2022.
It also acquired Spirit Realty Income in October in a transaction valued at $9.3 billion. Spirit gives it a complementary real estate portfolio and annualized growth in adjusted funds from operations of more than 2.5%. The deal shows Realty's ability to grow through mergers and acquisitions in addition to its regular real estate operations.
Realty Income's triple-net-lease approach gives the company a strategic advantage while reducing risk and delivering excellent long-term returns. With a dividend yield above 5% and interest rates expected to fall this year, now looks like a great time to pick up some Realty Income stock.
