Realty Income (O -0.56%) has been a terrific investment over the decades. The real estate investment trust (REIT) has delivered a 13.6% compound annual total return since its public market listing in 1994. A big factor driving its strong returns is its steadily rising dividend.
The REIT is in an excellent position to continue growing shareholder value in the future. Here are a trio of reasons that drive the view that investors should aggressively buy this stock.
Image source: Getty Images.
A bankable stream of monthly passive income
With a name like Realty Income, you know that the company's dividend is the main attraction. The REIT's mission is "to invest in people and places to deliver dependable monthly dividends that increase over time." It has certainly been successful in achieving that mission throughout its history.
Realty Income has paid 659 consecutive monthly dividends since its formation. It has increased its payment 130 times since its public market listing in 1994. It has also raised its payment for 110 consecutive quarters and 30 straight years, growing it at a 4.3% compound annual rate during that period.
The company currently has a 5.8% dividend yield, several times higher than the S&P 500 at less than 1.5%. And that high-yielding payout is on very solid ground. Realty Income generates very stable rental income backed by long-term net leases. It also has a low dividend payout ratio for a REIT, at around 75% of its adjusted funds from operations (FFO). In addition, its balance sheet ranks among the 10 best in the sector. As a result, Realty Income pays one of the most bankable high-yielding payouts you'll find.
A massive $14 trillion growth runway
Acquisitions are the REIT's main growth driver. It routinely completes sale-leaseback transactions with property owner-operators, buys portfolios from other investors, acquires REITs, and completes build-to-suit projects. Last year, it purchased $4 billion in properties and acquired fellow REIT Spirit Realty in a $9.3 billion deal. It aims to invest about $4 billion into new properties this year.
While Realty Income is already the world's seventh-largest REIT with $59 billion in real estate, it has plenty of room to continue expanding. The company estimates that the total addressable market for net lease real estate is $14 trillion across the U.S. and Europe. It has been steadily enhancing its ability to capitalize on this massive opportunity by expanding into new investment verticals.
In recent years, it has expanded from its initial focus on the U.S. net lease retail sector to U.S. industrial, Europe, gaming, data centers, and credit investments. Realty Income has also recently launched a private capital fund management platform to tap the enormous private real estate investment marketplace. The company's strong financial profile and massive growth runway should enable it to continue expanding for decades to come.
Getting cheaper
Despite all its success in creating shareholder value over the years, shares of Realty Income have slumped. They currently sit about 15% below their 52-week high and 30% under their all-time high, largely because of higher interest rates. This lower share price is why it has such a high dividend yield.
While the REIT's share price has fallen, its adjusted FFO has continued rising and in fact has grown every year since it came public, except for 2009. As a result, Realty Income's valuation has steadily fallen.
Realty Income expects to generate between $4.22 and $4.28 of adjusted FFO per share this year. With its share price recently around $55 apiece, the REIT trades at about 13 times its adjusted FFO. That's below the 15 to 18 FFO valuation range of other net lease REITs focused on retail and industrial properties. Meanwhile, there is additional upside potential if interest rates fall since that should push up valuations across the REIT sector.
Income and growth at a value price
Realty Income has a high-yielding dividend backed by a very strong financial profile. It also has a long growth runway. Add in its low valuation, and it could produce above-average total returns in the coming years. That's why investors should buy this REIT like there's no tomorrow.
