Realty Income (O 0.09%) is a tortoise. It makes up for that as an investment by having a lofty 5.6% dividend yield. To put that yield into perspective, it is well over four-and-a-half times the size of the 1.2% yield on offer from the S&P 500 index. If you own Realty Income, make sure you own it for the right reasons. These are the big ones.
What does Realty Income do?
Realty Income is a net lease real estate investment trust (REIT), which means its tenants are responsible for most of the operating costs of the properties they occupy. The key for net lease transactions is that they are really financing-like deals. The company selling the asset needs cash, and the most cost-effective way to raise cash is to jettison a property and instantly lease it back. This way, it maintains control of a vital asset and gets the cash it needs.
In this situation, Realty Income will generally have a lower cost of capital than the company from which it is buying a property. That allows the REIT to do the deal, making a profit on the spread between its cost of capital and the rent it generates from the asset.
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This is pretty much as close to a win/win as you can get in the business world. But there are some important takeaways for investors looking at Realty Income. First, the way the REIT grows is by acquiring more properties. Second, on average, it won't make outsize returns on its investments because the sellers wouldn't do the deals if they weren't reasonable. By its very nature, Realty Income's business is a slow and steady performer.
Why would a dividend investor buy Realty Income?
The most obvious reason to like Realty Income is the 5.6% dividend yield. But there's a deeper story here. For example, that yield is backed by an investment-grade balance sheet. The REIT has increased its dividend annually for 30 consecutive years, clearly proving it is a reliable dividend stock.
The second big reason to buy Realty Income is that it is an industry behemoth. With a portfolio of more than 15,600 properties, it is easily one of the largest REITs in the world. Notably, it has a global footprint, too, with assets in both North America and Europe. And while it has a heavy focus on retail properties (roughly 75% of rents), it also has its fingers in the industrial, warehouse, casino, and data center niches.
All in, Realty Income has a lot of levers to pull when it comes to growth. Thanks to its financial strength and size, it has a low cost of capital. And its huge scale allows it to take on deals that smaller peers couldn't even consider.
But there's a cost to being the net lease industry's 800-pound gorilla. Given Realty Income's size, it requires a huge amount of investment to grow. In 2024, when the company grew adjusted funds from operations (FFO) by an impressive 4.8%, it bought $3.9 billion worth of properties. That's a lot of buying.
The goal for 2025 is to buy roughly the same amount of property dollar-wise. However, the interest rate environment is in a state of flux, and management doesn't think it will be able to get the same returns on its investments. That has resulted in a guide for adjusted FFO to be flat to up "just" 2%. That might seem like something of a letdown after 2024's results.
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Key Data Points
It shouldn't be, assuming you truly understand Realty Income's business. Given its size and conservative financial positioning (remember it is investment-grade rated), nearly 5% adjusted FFO growth is probably about as good as it gets for this REIT. Taking into account the outsize dividend yield, however, that's not a bad thing. Note that over the past three decades, the dividend has been increased at a compound annual rate of roughly 4.3%. That's more than enough to grow the buying power of the dividend over time because it is above the historical rate of inflation growth.
So, dividend investors are buying a financially strong and well-run company with a high yield and just modest growth appeal. If you are looking to maximize the income your portfolio generates, that shouldn't be a big problem.
Realty Income is a foundational dividend investment
Realty Income had a pretty darn good year in 2024. That isn't going to happen every year, and in fact, it looks like 2025 could be much slower on the growth front. If you are buying this REIT thinking it is a growth machine, you are making a mistake. Given its massive size, Realty Income just isn't capable of that anymore.
But that doesn't mean it is an undesirable dividend stock -- quite the contrary. It makes Realty Income a foundation on which you can build a strong income portfolio. You just have to go in knowing you are buying a slow and steady dividend tortoise that, over time, will reward you well with its reliable dividend for sticking around for the long term.
