If you haven't dabbled in real estate investment trusts (REITs), now might be a good time to warm up to the income-generating investments. Whether you want to diversify across asset classes or pad your growth-oriented portfolio with some dividend payments, this could be your chance to REIT 'em and reap.
The U.S. government has made it a priority this young year to keep interest rates low and the real estate market recovering. REITs could be a good place to take advantage of an investment with historically rising payouts at a time when fixed-income vehicles are likely going the other way.
If this resonates with you, you may as well start with a class act in this space. Realty Income (O +1.24%) is a REIT that could be one of the best companies to own this year. Let's take a closer look.
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Checks and balances
Income isn't the only consideration for REIT investors, but it's understandably a high priority. Realty Income's 5.5% dividend yield is at the lower end of the REIT range, but you might like the reasons for this. You can find REITs yielding more than twice what Realty Income shells out, specializing in mortgage-backed securities or risky real estate categories, but that often means sacrificing payout sustainability or capital appreciation.
Realty Income is so confident in its ability to deliver a steady flow of investment income that it's one of the handful of REITs that declare their distributions monthly. That may not make a difference to you, but let's get to something that will be universally appreciated.
Realty Income increased its dividend last month, something that it has now done 133 times since going public 32 years ago. Realty Income is part of a select group of income producers called Dividend Aristocrats®, having increased its dividend annually for at least 25 consecutive years (the term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC). Zoom in, and it's in a regal class of its own. Realty Income has delivered 112 straight quarters of hikes.
In today's market, where the interest rate on money market funds, CDs, and Treasury bills is sliding lower, Realty Income has a proven track record of stepping higher. A good story gets even better when you dive into the business itself.
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Key Data Points
A world of all-weather opportunities
You can't base an investment solely on total potential returns. Risk is where Realty Income becomes the class act of REITs. After more than 30 years of hikes, Realty Income has proven its worth through global economic setbacks and periods of geopolitical turmoil. The secret behind its stability lies in the composition of its portfolio.
Realty Income owns roughly 15,500 properties that it leases to mostly consumer-facing retail businesses. There are some restaurant chains, multiplex operators, and home improvement stores in the mix that are vulnerable to spending patterns, but its two largest categories -- supermarkets and convenience stores -- are as recession-resistant as they come. Those two categories make up more than a fifth of the portfolio.
However, even the balance of its tenants is holding up fairly well. Realty Income offers triple-net leases, with the tenants on the hook for property taxes, insurance, and routine maintenance costs. Realty collects a predictable stream of base rent, typically adjusted annually for inflation. Pushing the lion's share of the variable operating overhead to the renter might seem to incentivize defaults, but that's not happening. Realty Income is currently boasting a healthy 98.7% portfolio occupancy rate. This financially healthy and historically safe REIT could be a smart stock to own in 2026.
