Dividend stocks are wealth-creating investments. The average dividend payer has significantly outperformed non-dividend stocks over the long term. They've produced an average annual total return of 9.2%, compared with 4.3% for non-payers over the past 50 years, according to data from Ned Davis Research and Hartford Funds.
Realty Income (O +0.70%) isn't your average dividend stock. The leading real estate investment trust (REIT) has delivered a 13.4% compound average annual total return since its public market listing in 1994. The company's steadily increasing dividend has contributed to its ability to grow shareholder value over the long term. It can turn a relatively modest investment into a much bigger future payday.
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Key Data Points
A powerful wealth creator
Realty Income has grown tremendously over the years. In 1996, it owned $565 million of commercial real estate. Today, it's the seventh largest REIT in the world, with over $58 billion in real estate across eight countries.
The landlord hasn't grown just to grow. Its expansion has steadily created more value for its investors because it has focused on making accretive new investments that increased its cash flow per share. The REIT has grown its adjusted funds from operations (FFO) per share at a 5% compound annual rate since it came public. It only experienced one year when it didn't deliver positive adjusted FFO per share growth. That was in 2009, during the financial crisis.
Realty Income's growing cash flow has enabled it to steadily increase its high-yielding dividend, which currently sits at 5.6%. The REIT has raised its dividend 129 times since coming public, including the past 110 quarters in a row and all 30 years. Overall, it has grown its dividend at a 4.3% compound annual rate.
This combination of income and growth has really added up over the years:
Image source: Realty Income.
As that slide shows, a $100 investment made into Realty Income when it came public would have grown into over $4,000 if you reinvested your growing dividend income into buying more shares. That's a lot more money than an investor would have made by parking that $100 into an index fund.
Well positioned to continue growing shareholder value
Realty Income has laid a strong foundation to continue building value for shareholders. The REIT has a diversified portfolio of properties -- including retail, industrial, gaming, and others -- leased to many of the world's leading companies. It builds and buys properties secured by net leases with creditworthy operating tenants doing business in industries largely resilient to economic downturns and isolated from the pressures of e-commerce. Its portfolio thus produces very stable rental income that grows by around 1% per year as its long-term leases escalate rents.
The REIT pays out about 75% of its steady rental income in dividends. It retains the rest to help fund new income-generating real estate investments. That amounted to $930 million last year.
Realty Income also has an elite balance sheet. It's one of only eight REITs with two bond ratings of A3/A- or higher. That enables it to borrow money at lower cost and at better terms than lower-rated REITs can do.
There should be no shortage of investment opportunities to continue putting capital to work. Realty Income estimates that there's $5.4 trillion of commercial real estate suitable for net leases in the U.S. and another $8.5 trillion in Europe. It has enhanced its growth prospects by adding new property verticals, including gaming and data centers; expanding into additional international markets, including France, Germany, and Portugal; and launching new investment platforms, such as credit and private capital management. Expanding its platform has provided the REIT with new growth opportunities and the flexibility to invest where it can earn the highest returns.
Buy and forget
Realty Income is a proven wealth creator. The REIT has steadily expanded its portfolio, cash flow per share, and high-yielding dividend over the years. That growth is likely to continue, given the strength of its portfolio, financial profile, and expansion prospects. It's a great stock to buy and hold for the very long term.
