Many investors have gotten burned by dividend stocks in recent years. Several well-known companies have reduced their payouts, marking the end of years of steady growth (I'm looking at you, 3M, Intel, and Walgreens). That can make any investor want to throw in the towel and give up on dividend investing.
However, while some notable dividend stocks have faced challenges in recent years, Realty Income (O +0.75%) remains a rock-solid income producer. Here's why investors should consider adding this resilient income stock to their portfolio.
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Built to deliver dividend dependability
Realty Income's mission is to deliver dependable monthly dividends to investors that steadily rise over time. The real estate investment trust (REIT) has been very successful in achieving that goal over the years. It has increased its payment 132 times since its listing on the New York Stock Exchange in 1994. Realty Income has grown its payout at a 4.2% compound annual rate, raising it every year during that time frame and for the past 112 quarters in a row.
The biggest factor driving its steady growth is the stability of its real estate portfolio. Realty Income owns an increasingly diverse portfolio of commercial real estate (over 15,500 retail, industrial, gaming, and other properties across the U.S. and Europe leased to tenants in 92 industries). It primarily owns properties secured by long-term net leases with many of the world's leading companies (its top tenants include FedEx, Home Depot, and Walmart). Those leases produce very stable rental income as tenants cover all property operating costs, including routine maintenance, real estate taxes, and building insurance.
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Key Data Points
Realty Income's portfolio is so durable that it has only had one year when it didn't grow its adjusted funds from operations (FFO) per share (2009). While its income dipped slightly that year, the REIT still had the financial flexibility to continue increasing its dividend. That's due to its conservative dividend payout ratio (currently around 75% of its adjusted FFO) and its elite balance sheet (its credit rating is among the top ten in the REIT sector).
Well-positioned to continue growing its dividend
Realty Income's conservative financial profile affords it ample financial flexibility to continue expanding its portfolio of durable, income-producing real estate. Thanks to its low payout ratio, the REIT retains significant excess free cash flow that it can invest in new properties. It's on track to generate $843.5 million in surplus cash this year. Meanwhile, its high credit rating provides it with greater access to low-cost capital to fund new investments. The REIT also routinely sells lower-quality properties to recycle capital into higher-quality new investments.
The company's diversified investment strategy provides it with an abundance of investment opportunities. It sourced $97 billion of potential investment volume through the end of the third quarter. However, it only closed on $3.9 billion of deals as it only moved forward with the best investments. For example, most of its investments during the third quarter were in Europe ($1 billion out of its $1.4 billion investment volume), as it was able to lock in significantly higher initial weighted average cash yields (8% in Europe compared to 7% in the U.S.). Realty Income has also used its flexibility to invest in development projects (7.4% average yield on new investments this year) and credit investments like development loans and mortgages (8.9% average yield this year). The REIT should have no shortage of future investment opportunities, considering that the global net lease market is estimated to be $14 trillion across the U.S. and Europe.
A dividend stock you can bank on
While many dividend stocks have let investors down in recent years, they shouldn't give up on these investments. Realty Income is a rock-solid option. It has a tremendous track record of increasing its dividend, which seems likely to continue. The REIT boasts a top-notch financial profile that supports its dividend payment and enables it to continue expanding its portfolio, which drives dividend growth. Those features put it in a strong position to continue paying investors a higher dividend, regardless of what happens in the market in the future.
