Realty Income (O 1.79%) has quickly made a name for itself as one of the most reliable-paying dividend stocks. Since its IPO in 1994, the company has raised its dividend payouts 118 times, which equates to one or more increases per quarter during that 28-year period.
But even a track record as strong as Realty Income's doesn't guarantee the company can keep paying. Since the start of the global pandemic, investors have become increasingly concerned about the future of the real estate investment trust (REIT). In response, the stock has fallen 3% since last year and is down 11% over the last three years.
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Key Data Points
Despite investors' worries, here's why Realty Income is more than capable of paying you for years to come.
The company is growing rapidly
Realty Income is the largest publicly traded net lease REIT and the fourth-largest REIT of any kind in the world. The company has an absolutely massive portfolio of over 11,700 commercial real estate properties that it leases to a wide range of tenants on long-term net leases across the United States, Europe, and the U.K.
The bulk of its portfolio is retail properties, but it does have a small but growing number of other commercial real estate properties like hotels, office, industrial, and casino properties. This diversification is largely thanks to its recent shopping spree. From 2020 to 2022, the company spent over $13 billion in new acquisitions, growing its portfolio of properties by 83%.
To put this into scale, the company acquired over 5,000 properties in a three-year span. This is almost the total number of properties retail-focused net lease REITs Agree Realty and National Retail Properties own in their entire portfolios combined.
At the end of 2022, Realty Income announced its plan to acquire CIM Real Estate Finance Trust (CMFT), which would add another 185 single-tenant retail and industrial properties to its portfolio. It also recently completed the acquisition of the Encore Boston Hotel and Casino, which the REIT is leasing back to Wynn Resorts through a sale-leaseback agreement.
The impact of these acquisitions will be accretive to the company starting in 2023. Realty Income has around $187 million in liquidity as of the third quarter of 2022 but is actively raising more money to help fuel further acquisitions in 2023.
Its dividend is well covered
Its outpaced portfolio growth these last few years has helped the company maintain a healthy dividend payout ratio despite consistently increasing its monthly payments. The company's funds from operations (FFO), a key metric for assessing a REITs profitability, was up 9% year over year in the third quarter of 2022 and up 24% for the nine months ended Sept. 30, 2022, compared to the year before.
Steady growth in FFO means it has ample coverage for its increasing dividends. As of its latest reported earnings in the third quarter of 2022, its payout ratio was 76%. This may seem high compared to other dividend-paying stocks, but for a REIT, this is well within a stable range.
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Not many stocks can boast about maintaining 27 years of dividend increases. It's a track record I personally believe the company will work hard to continue growing. Today, the stock yields around 4%.
At the end of the third quarter of 2022, it collected around 85% of contractual rents. This is notably lower than its nearly 99% occupancy rate but includes negative impacts on its theater operator Cineworld Group, which has filed for bankruptcy. This should improve in the coming quarters as Cineworld finalizes its repayment plan. As of October 2022, it collected 100% of its theater portfolio.
Rising interest rates are impacting Realty Income's cost of borrowing, and a slowing economy could weigh on the retail industry further, but its diversified portfolio and healthy financial position mean the company is well positioned to withstand market challenges.
If you don't own shares of Realty Income yet, now is still a favorable time to get in.
