What if I told you there was a stock that has quadrupled the S&P 500's returns since it hit the market? You may think it's one of the "Magnificent Seven" stocks or another high-flying growth stock.
Now, what if I told you this stock also pays a monthly dividend? If this detail made it a little bit harder to guess, you're not alone. Although Realty Income (O +0.21%) is in the S&P 500, it tends to float below the radar because it's not as "sexy" as many growth stocks that get the media attention.
However, Realty Income has been on a strong run since hitting the market in 1994, with total returns nearing 8,700%. This is roughly four times the S&P 500's returns over that span. Given its past success, is Realty Income a good investment going forward? I believe so.
O Total Return Level data by YCharts
A relatively simple business model that pays off
Realty Income is a real estate investment trust (REIT) that specializes in single-unit freestanding commercial properties. These are stand-alone buildings (not malls or shopping centers) leased to a single tenant under a long-term lease.
As a REIT, Realty Income is required to distribute 90% of its taxable income to shareholders. It's a fairly straightforward business model. Realty Income buys properties, charges rent to tenants (usually larger corporations), and pays shareholders a monthly dividend from the rental income.
The model seems to be working well for Realty Income. The $250 million in net income it made in the first quarter was up nearly 280% from a decade ago. That's $0.28 net income per share, with Realty Income expecting this number to fall between $1.40 and $1.46 in 2025.
NYSE: O
Key Data Points
A client base that provides Realty Income with stability
Considering REIT dividends are directly tied to the amount of money the REIT earns, it's essential for the REIT's properties to have high occupancy and stable income. Since Realty Income focuses on commercial properties, it leases to clients that have the resources to maintain long-term lease agreements.
Below are the top 10 industries that Realty Income's clients operate in:
| Industry | Percentage of Annualized Base Rent |
|---|---|
| Grocery | 10.3% |
| Convenience Stores | 9.9% |
| Dollar Stores | 6.3% |
| Home Improvement | 6.3% |
| Restaurants, Quick Service | 4.9% |
| Drug Stores | 4.6% |
| Automotive Service | 4.5% |
| Health and Fitness | 4.3% |
| Restaurants, Casual Dining | 3.9% |
| General Merchandise | 3.4% |
Source: Realty Income. Percentages as of March 31.
With the possible exceptions of restaurants and home improvement, these are industries that tend to thrive in any economic conditions, helping to create a steady cash flow for Realty Income and its shareholders.
Since 1992, the company's properties have never had an occupancy rate under 96%. The lowest occupancy rate during that time was 96.6% in 2010, after the 2008 financial crisis and during the Great Recession.
A dividend you can count on for the long haul
It's no secret that Realty Income's appeal is its monthly dividend. Its current monthly dividend is $0.2685, with a yield of around 5.5% as of June 11. That's slightly below its 10-year average of 4.5% but more than four times the S&P 500's current yield.
O Dividend Yield data by YCharts
Realty Income's dividend has been a textbook example of consistency. It has declared a monthly dividend for 659 consecutive months, including increasing the payout for the past 110 quarters (130 total increases since 1994).
It's one thing to pay an attractive dividend; it's another thing to be committed to consistently increasing the dividend, which Realty Income has shown.
For most investors, REITs shouldn't be a large portion of their portfolios because the real estate focus lacks diversification. However, they make great supplements for those who want more consistent income than the typical quarterly dividend stocks.
