It isn't often that both income-focused investors and total-return-oriented investors can agree on a stock. However, one company -- boring and high-yielding Realty Income (O +0.49%) -- might actually be a winner for both. Here's why this income stock, which is down more than 20% from its 2022 highs, could be a great option for both dividend lovers and those who aim for total return by reinvesting their dividends.
What does Realty Income do?
Before examining performance numbers, it is essential to understand what Realty Income does as a business. It is a real estate investment trust (REIT), focused largely on owning retail properties (roughly 80% of rents). The properties it owns are single-tenant and have net leases. A net lease requires the tenant to pay for most property-level operating costs. Although any single property may be high risk, across a large portfolio, the risk is relatively low. Realty Income is the largest net lease REIT, with over 15,500 properties.
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In addition to being large, Realty Income is geographically diversified. Notably, around 18% of its rents come from Europe, where the use of net leases is still fairly new. And while it is focused on retail properties, the types of assets it buys are generally very similar. That makes them easy to buy, sell, and release as needed. The 20% of rents outside of retail, meanwhile, include a fairly interesting mix of industrial properties and one-off assets, like casinos and data centers. Despite the retail focus, it is actually one of the more diversified REITs you can own.
That said, management is aware of the limitations that come along with Realty Income's size. This is why it has been expanding into Europe. The company has also broadened its approach to include financing, and it is currently building a fee-based asset management business for institution investors. The ultimate goal is to have as many irons in the fire as possible to support the company's slow and steady growth over time.
NYSE: O
Key Data Points
Realty Income can be a winner in two ways
The proof of Realty Income's success as a business is best highlighted by its dividend history. The REIT has increased the dividend annually for three decades. Within that streak, it has increased the quarterly dividend for 112 quarters. This is a very reliable dividend stock.
Now add in a 5.5% dividend yield and an investment-grade-rated balance sheet. It is easy to see why a dividend investor trying to live off the income they generate would appreciate owning shares of Realty Income, noting that the S&P 500 is offering a tiny 1.1% yield right now.
However, growth investors might appreciate boring dividend-focused Realty Income, too. As the chart highlights, reinvesting dividends would have yielded a massive 9,100% total return for investors since Realty Income's initial public offering. That trounces the S&P 500's total return of just under 2,500% over the same span.
O Total Return Level data by YCharts
There are some caveats to consider here. When Realty Income went public, REITs weren't a well-understood asset class, and the yields were generally higher. Dividend reinvesting may not yield the same kind of total returns in the future as it has in the past. However, the 5.5% dividend yield gets you a long way toward the 10% return that most investors expect over the long term from buying stocks.
Realty Income could still be a reliable compounder, providing growth investors a foundation on which to layer riskier, higher-growth investments. In that way, this dividend stock could help non-dividend investors build a millionaire-sized nest egg.
Think outside the box, and you'll find more ways to build wealth
The simple view of Realty Income is that it is a boring and reliable dividend stock, which it is. However, that doesn't mean that it can only be viewed as a dividend stock. If you reinvest dividends with a focus on total return, this seemingly boring dividend stock can be a strong addition to a growth-oriented portfolio as well. The hidden benefit is that reinvesting Realty Income's reliable dividend could allow you to take more risk with other investments.
