Realty Income (O -0.21%) is one of the largest real estate investment trusts (REITs) in the United States, with a portfolio of about 15,600 properties and a roughly $50 billion market cap.
Although Realty Income (and most other REITs) has underperformed the S&P 500 in recent years, this has been primarily driven by interest rate headwinds. The company's long-term track record through multiple economic cycles speaks for itself, and a look at the company's recent results shows that the underlying business is doing quite well.
As of this writing, Realty Income has a historically high 5.7% dividend yield and is trading about 12% below its 52-week high. Here's why this could be an excellent time to add this long-term wealth builder to your portfolio and hold on for the long haul.
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Realty Income is built for steady compounding
Realty Income is a "net lease" REIT, which is a broad term that refers to a type of commercial lease that is common among freestanding (single tenant) properties. About three-quarters of the rental income is from retail tenants, while industrial, gaming, and agricultural tenants also can be found in the portfolio.
Realty Income's main growth mechanism is through sale-leaseback transactions. It buys properties that are owned by the tenants that occupy them, and then leases them back, thereby only acquiring properties with a stable tenant already in place. Top tenant types include dollar stores, convenience stores, grocery stores, restaurants, and home improvement retailers, just to name a few.
There are two key points:
- Realty Income's tenants are generally resistant to recessions and e-commerce disruption.
- The net lease structure typically has long initial terms with annual rent increases built in.
Because of this, Realty Income is designed to create shareholder value and produce a steadily growing income stream over time. The company not only has a 5.7% dividend yield, but it has increased the payout for 111 consecutive quarters.
Lots of room to grow
15,600 properties may sound like a massive portfolio of real estate assets (and it is), but it would be a mistake to dismiss Realty Income as a "mature" business.
The net lease real estate market in the United States is estimated to be about $5.4 trillion in size, so it's fair to say that the company could still have plenty of opportunities. Only about $215 billion of this is owned by public REITs today. In some of Realty Income's newer verticals, such as gaming properties, data centers, and medical, the company has barely started to scratch the surface.
In Europe, Realty Income has an even larger opportunity. Not only is the net lease real estate market even larger at $8.5 trillion, but it is in the very early stages of REIT consolidation with only about 0.1% of net lease properties owned by public REITs.
Will buying Realty Income stock today set you up for life?
The short answer is "it depends." Everyone who is reading this has a different financial situation, so the amount of wealth or income it would take to 'set you up for life' can be vary.
Having said that, Realty Income could certainly be an excellent way to create wealth and build an income stream over time. Since Realty Income's 1994 NYSE listing, the stock has generated a 13.6% annual total return for investors.
To put this into perspective, consider that a $10,000 investment in Realty Income at that time would have grown to about $520,000 just over 30 years later. Even better, your investment would now be generating about $29,600 per year in dividend income – nearly three times your original investment.
Furthermore, this assumes that you invested $10,000 once and just left it alone. Imagine if you had added $1,000 per year along the way. $2,000 per year? You get the idea – although part performance doesn't guarantee future results, investing in compounders like Realty Income over long periods of time can certainly set you up for life.
