This week, Realty Income (NYSE:O) announced it had surpassed the $3 billion mark in total dividends returned to shareholders. And there's one essential way it has managed to raise its dividend for 66 quarters in a row that often goes undiscussed.
The massive dividend payouts
In the announcement of passing $3 billion in dividends, the CEO of Realty Income said:
We are pleased with the company's consistent performance that has allowed us to pay over $3 billion in monthly dividends to our shareholders...we remain committed to operating our company in a manner that supports the payment of monthly dividends to our shareholders.
And a simple glance at how its dividend has risen over the last 20 years shows the remarkable growth:
How it does so
So how has it so steadily risen its dividend through the years? Many people know one way is through acquisitions, as its real estate assets have ballooned from $339 million in 1994 to $9.3 billion at the end of March. The biggest jump came just last year when it acquired nearly 975 properties worth $4.7 billion:
But it turns out there's another way it boosts its dividend. The company's latest annual report noted plainly:
We seek to increase distributions to stockholders and funds from operations, or FFO, per share through both active portfolio management and the acquisition of additional properties.
Acquisition of additional properties is easy to spot and understand. But active portfolio management is a bit more of a mystery. So let's examine what that means.
Active portfolio management
The portfolio management department of Realty Income is run by Richard Collins, who has been with the firm since 1990 and previously headed up the acquisitions group. So he knows a thing or two about seeking to increase the FFO that dividends are paid from.
But what exactly does that portfolio management do? Let's check back in the annual report:
- Contractual rent increases on existing leases;
- Rent increases at the termination of existing leases, when market conditions permit; and
- The active management of our property portfolio, including releasing vacant properties, and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.
While it may be less glamorous than headline grabbing property acquisitions, portfolio management is the critical business function of a REIT to ensure properties are well maintained and continue to deliver topline results.
It examines both the broader performance of industries in which its tenants operate -- 47 separate ones at last count -- and it also monitors "the operation, management, business planning, and financial condition," of the individual tenants themselves.
Although the numbers aren't as large -- it expects $50 million in proceeds this year -- it also sells the assets Realty Income no longer needs. It will in turn use the money generated to invest in other properties that will likely yield higher returns, but also help eliminate the risks of become too concentrated in particular areas or industries.
The key takeaway
There's a lot to like about Realty Income, but a critical part of investing is understanding not only the glamorous aspects of a business -- like big acquisitions for REITs -- but all parts of it. And when you consider how well Realty Income has operated through the years, there's no doubt that while it may not be pretty, its portfolio management function has been one key to its success.
Patrick Morris owns shares of Realty Income.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.