Realty Income (O +1.14%) does a magnificent job paying dividends. The real estate investment trust (REIT) has paid 647 consecutive monthly dividends throughout its 55-year operating history. It recently increased its monthly payment by 2.1%. That marked the 107th straight quarter it increased the dividend, and the 125th time since its public market listing in 1994.
The REIT's dividend will undoubtedly continue rising in the future. Here's why the already high-yielding company, with its 5.5%-plus forward dividend yield, can continue sending more cash to its investors.
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Key Data Points
Its needle-moving deal is already paying dividends
Realty Income's latest dividend increase of 2.1% is already this year's third payment bump. It's also the year's biggest increase; the other two were 0.2% raises. The recent payout boost is also sizable compared with its dividend growth over the past year, which is 2.4% based on its annualized rate at the end of the first quarter.
The primary driver of the larger increase is the REIT's highly accretive acquisition of Spirit Realty, which closed earlier this year. The company expects that deal to boost its adjusted funds from operations (FFO) by more than 2.5% per share this year. Add in rent growth of about 1% on a same-store basis and other acquisitions and investments, and its FFO should rise by 3.3% to 5.3% in 2024. The REIT aims to invest $2 billion this year.
Realty Income can easily afford its higher dividend. The REIT's dividend payout ratio was a conservative 74.8% of its adjusted FFO per share in the first quarter, down from 76.3% last year. That healthy level will allow the REIT to retain about $800 million in cash flow this year after paying dividends to fund new property investments.
Lots more growth ahead
Realty Income believes it can continue growing its adjusted FFO per share at a healthy clip in the future. The REIT estimates that rent growth and internally funded investments will increase its adjusted FFO per share by around 2% annually in the future. That provides a nice base growth rate and a foundation for future dividend increases.
In addition, the company expects to continue expanding its portfolio by investing in property acquisitions and development projects. Realty Income is being very selective on new investments this year because of the continued challenges the commercial real estate sector faces from higher interest rates. Its planned investment volume of $2 billion is well below its spending level in recent years; it was over $9 billion each of the past two years. It can afford to be more selective because of the accretion it's getting from the Spirit Realty deal. That's allowing it to focus on its highest-return investment opportunities, which have increasingly been in Europe.
In the long term, the company expects to increase its investment volume. Realty Income estimates it can boost its adjusted FFO growth rate by about 0.5% per share for every $1 billion of externally funded acquisitions -- i.e., those financed by issuing new stock and debt. It's targeting to deliver 2% to 3% of incremental adjusted FFO per share growth each year, implying it will make $4 billion to $6 billion of externally funded acquisitions. That positions it to deliver 4% to 5% of adjusted FFO-per-share growth each year over the longer term, around its historical 5% growth rate.
While Realty Income is being more conservative this year, it should have no shortage of future investment opportunities. The company estimates that the U.S. commercial real estate sector alone has $4.7 trillion of traditional net lease properties across the freestanding retail, industrial, consumer-centric medical, and data center sectors. On top of that, the REIT sees emerging investment verticals such as data center development and gaming properties adding more than $700 billion of additional investment opportunities. In addition, the company sees $8.5 trillion in investment opportunities across the U.K. and developed Europe. Realty Income has expanded into new investment verticals in recent years -- such as data center development, gaming, and additional European countries -- to enhance its already long growth runway.
Realty Income's dividend should keep rising
Realty Income has done an incredible job paying dividends over the years, and it should continue to do so in the future. The REIT expects to grow its adjusted FFO by 3% to 5% per share in 2024 and at around a 4%-5% annual pace over the long term. That should enable the company to continue increasing its dividend at a low-single-digit pace each year. With an already attractive-yielding monthly payout, Realty Income is a top option for those seeking a steadily rising passive income stream.
