I own a couple dozen stocks. I like each and every one of them, given that I chose them out of the thousands of potential stocks available on Wall Street. Picking just one would be difficult. Yet, given my dividend focus, I would lean toward Realty Income (O -0.24%) today. The reason is partly because of its well-above-market 5.6% dividend yield, but there's much more to like beyond that simple fact. Here's what you need to know.
What does Realty Income do?
Realty Income is a net lease real estate investment trust (REIT). It owns single-tenant properties where the tenant is responsible for most property-level operating costs. The purpose of this leasing approach is pretty simple. The tenant effectively retains operating control of the asset, and Realty Income avoids the cost and effort of taking care of the property.
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In fact, sale leaseback transactions are used in the net lease world. This means that the seller instantly becomes the lessee, usually with a long-term lease that includes regular rent bumps. It is really a financing transaction for the seller, which raises capital from the sale but still retains that all-important operational control of a vital asset. Realty Income is supplying the capital and getting a reliable tenant with a vested interest in the property. It's pretty close to a win/win transaction.
Realty Income is one of the largest and most diversified net lease REITs you can buy. Its market cap is more than three times the size of its next closest peer's. It owns over 15,600 properties. It has exposure to retail and industrial assets, and its portfolio includes properties in both North America and Europe.
To be fair, Realty Income's size is also a problem to consider. The REIT simply can't grow quickly because it is already so large. So slow and steady is the name of the game. The average annualized dividend growth rate over the past 30 years was roughly 4.1% a year. Thirty years, by the way, is the length of Realty Income's dividend streak. So it is a reliable, though slow-growing, dividend stock.
Realty Income is a foundational investment with an attractive yield
Buying just one stock really isn't a reasonable expectation, but that doesn't mean you shouldn't own some companies that are foundational investments. For those with an income bias like me, Realty Income offers just such a foundation. It's a risk/reward trade-off, for sure, but one that comes with a very attractive 5.6% dividend yield.
Putting that yield into perspective will help explain why now is a good time to buy Realty Income. For starters, the S&P 500 is only offering a yield of roughly 1.2%. The average REIT is yielding 4%. Realty Income's average yield over the past decade is a little under 4.5%. In fact, the REIT's current yield is near the high end of the yield range over the past decade.
Realty Income isn't going to excite you. But it should continue to provide you with a healthy income stream (paid monthly) for years to come. That income stream is highly likely to keep growing, albeit slowly, over time, and that can create a strong foundation for your broader dividend portfolio. It allows you to reach out a little bit and buy stocks with lower yields but higher dividend growth rates, like Hormel Foods, Hershey, or even fellow net lease REIT Agree Realty.
Add this one to your portfolio and don't look back
I wouldn't really recommend buying just one stock, because diversification is important. Still, Realty Income is a very well-run business offering a high yield that is backed by a reliably growing dividend. It has all the hallmarks of a one-and-done type stock for income-oriented investors. If you are looking for a foundational dividend stock, Realty Income should be on your short list today.
