It's been four years since I invested in Realty Income (O +0.93%). One of the market's largest real estate investment trusts (REITs) -- and the top dog in triple-net leases for commercial real estate -- is a staple in many fixed income portfolios.
The reasons why a growth investor like me decided to buy into Realty Income are probably the same reasons why I'm never planning to cash out of my position. Let's walk through some of the reasons for never selling Realty Income.
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1. The beauty of triple-net leases
I realize that I introduced the concept of net leases earlier, and I may as well start by explaining what it means. A tenant looking to partner with Realty Income's growing portfolio of properties will have to enter into a triple-net lease.
The base rent of a triple-net lease is as transparent as it is reasonable, typically tied to inflation-adjusted increases each year. The "triple" component here is that the tenant also has to pay property taxes, insurance, and regular maintenance costs in addition to that.
In other words, Realty Income passes along some of the more variable occupancy expenses to the tenant. Meanwhile, Realty Income collects a steady stream of rent payments that go up slightly every year. The unpredictability of payment burdens on the tenant can lead to defaults along the way, but Royalty Income has a proven track record of collecting missed payments and quickly filling any vacancies.
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2. Many of its tenants are recession-proof if not recession-resilient
Realty Income doesn't just hand its keys to anybody. Most of its tenants are in all-weather industries. The largest of the industries it serves is grocery store operators, accounting for 10.8% of its portfolio. The next biggest category is convenience stores, at 9.7% of its roughly 15,500 properties.
Not all of its tenants fall into these categories. Realty Income is a major player for restaurants and even movie theaters. However, its growing base of tenants that thrive in good times and bad makes it easy to flip any of its properties over if a tenant does have to bow out. Realty Income currently has a 98.7% portfolio occupancy rate.
3. The dividend keeps going up
A distinctive feature of Realty Income is that it pays out cash distributions on a monthly basis. This might not be a major selling point to you, but it could be at some point. More importantly, there's a historical tendency for those payouts to grow over time.
When Realty Income increased its monthly dividend this time -- stretching its streak of disbursements to a devilishly cool 666 months -- it was the 133rd time that it boosted its distribution rate. The increases aren't much, but the direction itself is worth applauding.
Realty Income is a Dividend Aristocrat, having increased its dividend annually for at least 30 consecutive years. It's no mere aristocrat. Realty Income has also come through with 112 consecutive quarters of hikes. There isn't even a regal term for that feat in the world of income investing.
Realty Income is a relatively safe REIT with a dividend that is increasing at a time when fixed income rates are heading lower after the three recent Fed rate cuts. A forward dividend yield of 5.8% that is almost a lock to continue going up in a climate where rates can be volatile is a good place for even growth investors to be.
