Realty Income (O 1.63%) is not going to excite you, but if history is any guide, it will keep paying you well year in and year out. That's the attraction here, a dividend that just keeps chugging higher over time. And given the attractive 5.5% dividend yield right now, this real estate investment trust (REIT) could very well set you up with a lifetime of passive income.
What does Realty Income do?
Realty Income is a net lease REIT, which means that its tenants pay most property-level operating costs. With a large enough portfolio, that's a pretty low-risk investment approach. Realty Income owns over 15,400 properties, making it the largest net lease REIT you can buy. Based on market cap, it's around four times as large as its next closest competitor.
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Although Realty Income's main focus is on retail properties, which make up around 73% of rents, it also has exposure to industrial assets (17% or so) and a few unique niches (casinos and vineyards, for example). Its portfolio also reaches across the pond to Europe. Overall, it's one of the more diversified REITs you can buy.
How successful has Realty Income been?
REITs are designed to pass income on to investors via dividends in a tax-advantaged manner, given that they avoid corporate-level taxation if they pay out at least 90% of taxable earnings as dividends. (Shareholders have to treat REIT dividends as regular income.) So looking at a REIT's dividend history is a good indication of its success. Realty Income has increased its dividend annually for 30 years. The average annualized increase over that span was a solid 4.3%.
To be fair, 4.3% dividend growth isn't going to blow anyone's mind. That's a slow and steady increase that is just a touch higher than the historical growth rate of inflation. However, when you add in the current dividend yield of around 5.5%, this suddenly turns into a slow and steady tortoise that income-focused investors will surely find attractive. After all, if you add 5.5% to 4.3% you get nearly 10%, which is the return most investors expect from the broader market over time.
Realty Income is a foundational investment
Realty Income isn't the kind of stock you'll likely brag about at cocktail parties. But given that the S&P 500 index's dividend yield is a scant 1.2% right now, it is a highly attractive dividend stock. If history is any guide, it will remain so in the future, passing a growing stream of income on to shareholders year in and year out.
Notably, being the 800-pound gorilla in the net lease sector comes with long-term benefits. Although Realty Income's size requires a lot of transaction volume to move the needle on the top and bottom lines, it has the financial heft and strength (with its investment grade rated balance sheet) to buy lots of properties. Its size also makes it a key player in the sector when sellers are looking for buyers. And it tends to have advantaged access to the capital markets, again thanks to its size (and financial strength). In other words, there's no reason to believe that Realty Income's long-term trajectory of slow and steady business growth is about to change.
All this is why dividend investors will want to own Realty Income among their core, long-term holdings. It provides a foundation upon which a broader portfolio, including more growth-oriented investments, can be built. Realty Income's reliable income stream could, indeed, potentially set you up for life in more ways than one.
