Realty Income (O -0.57%) is a foundational stock that can be the backbone of a diversified dividend portfolio. Most income-focused investors should at least consider adding it to their holdings. Here's a look at five key reasons right now is the time to buy this real estate investment trust (REIT).
1. Realty Income has a lofty yield
The S&P 500 index (^GSPC 0.11%) is yielding about 1.3% today. The average REIT has a yield of 4.1%. Realty Income's dividend yield is roughly 5.7%. Very clearly, it is providing investors with more income than many other options.
O Dividend Yield data by YCharts.
That said, its yield is also toward the high end of its range during the past decade. It not only looks attractive relative to other options, but the REIT's yield also looks attractive relative to its own history.
2. Realty Income keeps paying more and more
Just having a high yield isn't enough to make a dividend stock a buy. Sometimes a high yield is a sign that the dividend isn't sustainable. But when it comes to providing investors with a sustainable and growing dividend, Realty Income looks like a winner. It has increased its payout annually for three decades and counting. Within that streak is a run of 110 quarterly increases.
This is a business that is designed to reward investors with reliable dividend growth. To be fair, the average annualized increase of the past 30 years was a modest 4% or so. That, however, is just slightly faster than the historical rate of inflation, which means the buying power of its payout is increasing over time.
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3. It's an industry giant
The company's property focus is on single-tenant net lease assets. A net lease requires the tenant to pay for most property-level operating costs. While any single property is high risk, since there's only one tenant, Realty Income owns 15,600 properties. The risk here is low because most tenants keep paying rent.
Realty Income isn't the just the biggest in this niche, it is also highly diversified. Roughly 75% of its rents come from retail properties, with the remainder in industrial assets and a broad "other" category. (More on that below.)
Unlike many of its peers, however, Realty Income isn't confined to the U.S. It has expanded into Europe, where the net lease model is still underutilized.
Its giant portfolio and broad reach work together to support slow and steady dividend growth, because the REIT can take on deals that its peers couldn't manage. That includes large portfolio transactions and acting as an industry consolidator.
4. It has advantaged access to capital
Being able to absorb large deals is more than just a size issue. It also requires access to capital. Luckily, being a large company makes it easier to sell stock and debt. So Realty Income has an advantage on that front, too.
But it doesn't take that for granted; it has worked to ensure it has an investment-grade balance sheet. That way, when it does go to the markets looking for cash, buyers provide it with attractive terms. An attractive cost of capital lets Realty Income bid aggressively for new properties while still being able to make a healthy profit.
5. It's expanding its options
The "other" category noted above is important. It includes assets like casinos and data centers, where the REIT is starting to explore new investments. Management is also starting to include loans in its mix and is beginning to provide net-lease asset management services to institutional investors. These are all additional irons in the fire to support long-term growth.
But the really exciting aspect here is that Realty Income is being innovative and experimenting with new investments. It is using what it does well -- net leases -- and expanding in new ways.
To some extent, its size requires this approach, given that it takes more to move the needle on the top and bottom line as a company grow larger. But still, the fact that Realty Income is steadily working to maintain its dominance is a sign of management strength. And it helps set up the company and its investors for future dividend increases.
It all comes back to Realty Income's dividend yield
This list started with dividend yield, and it will end with dividend yield because that's what income investors are looking for. But as noted, having a high yield, like Realty Income does, isn't enough to make a stock a buy. Reasons Nos. 2 through 5 help cement the deal, with this entrenched industry giant offering a value proposition that few can match. Right now is a good time to buy if you are looking to add an attractive dividend stock to your portfolio.
