Realty Income (O +0.37%) is the bellwether name in the net lease niche of the real estate investment trust (REIT) sector. However, just because a company is large and important doesn't mean its stock is doing well or is worth buying. In fact, some investors will probably find Realty Income a less-than-desirable holding.
However, more conservative dividend investors may want to consider buying this high-yield REIT like there's no tomorrow. Here are three reasons why.
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1. A strong history
What happened in the past is what has led Realty Income to its current position. Without getting too deep into the woods, the past included steady growth via property acquisitions. It included a few major acquisitions that have quickly boosted the company's scale. And it included moves to diversify and fine-tune the portfolio, focusing the REIT on attractive property niches.
The best sign of management's success is actually Realty Income's dividend, which has been increased annually for three decades and counting. However, that's not the only indication that this REIT is well run. For example, the dividend is backed by an investment-grade-rated balance sheet and a portfolio that includes more than 15,500 properties. In other words, Realty Income got very big in a conservative manner while regularly rewarding investors all along the way.
This is the type of backstory that should interest even the most risk-averse investor.
2. An opportunity for a very strong future
Today, Realty Income is heavily focused on single-tenant retail properties, which comprise approximately 80% of the rent roll. These properties tend to be very similar, making them easy to buy, sell, and release as needed.
The REIT also has exposure to industrial assets (15% or so of rents) and a collection of more unique properties (about 5%), which include things like casinos and vineyards. It generates around 80% of its rents from the United States, with the rest coming from Europe. All this means it has many options when it comes to buying properties.
However, the company isn't sitting still. It has been looking to expand its growth options even further. Those efforts have included providing debt financing to other companies and building an asset management business.
The asset management business is interesting because it leverages Realty Income's existing team of professionals to generate fees. That fee income should remain resilient even if the company's owned portfolio of assets is struggling for some reason, such as a recession.
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Key Data Points
And don't forget Realty Income's vast size. With a $50 billion market cap, it has easy access to capital markets for raising growth capital. Being financially strong makes that access even more robust. In addition, being the industry giant means that it usually gets to see all the important deals in the net lease market.
Management has built a solid business with solid growth prospects.
3. The yield is attractive
All that is great, but is it worth buying Realty Income at this time? If you are a growth investor, the answer is likely to be no. It is likely to be a slow-growing tortoise.
However, that will probably be perfectly fine for most conservative dividend investors, as this tortoise comes along with a 5.7% dividend yield. It could easily be a foundational investment, on top of which stocks with lower yields, but higher dividend growth rates, can be layered.
It is worth making a few comparisons on the dividend front. The S&P 500 (^GSPC 0.05%) is offering a tiny 1.2% yield today, and the average REIT's yield is around 3.9%. Realty Income's yield is also toward the high end of its range over the past decade. If you are looking to maximize the dividend income your portfolio generates, now looks like a pretty good time to add Realty Income to the mix.
Know what you're buying
Realty Income's dividend has grown at a compound annual rate of 4.2% over the past 30 years. That's faster than the historical growth rate of inflation, so the buying power of the dividend has increased over time.
However, there are other stocks with faster-growing dividends. This is not a stock you buy for growth; it is a stock you buy for income. But if that's what you are after, you might want to buy it today like there's no tomorrow.
