While safety can never be guaranteed when investing, there are some stocks that offer a greater level of security than others.
Realty Income (O 2.00%), for example, not only survived the past three recessions but it raised its dividend payout during the dot-com bubble, the Great Recession, and the coronavirus pandemic. In total, it's made 120 dividend increases in its 29-year tenure as a company.
Let's take a closer look at what makes this company such a safe investment.
Safety in net leases
One of the biggest reasons Realty Income has such an impressive dividend track record even during recessionary periods is its reliable business model. The real estate investment trust (REIT) owns and leases more than 12,200 single-tenant commercial properties in the U.S., Spain, the U.K., Italy, and Puerto Rico. Its portfolio is mostly retail real estate, but it's recently expanded into other commercial industries like industrial real estate and gaming resorts.
These properties are leased to long-term tenants using triple net leases (NNN), which pass most, if not all, expenses of the properties on to the tenants over nine-year-plus periods. The leases include incremental rent increases, ultimately creating super-steady income for Realty Income with very little overhead.
The net lease industry is usually very resilient during recessionary periods. The business model is a big reason for this, but diversification across different markets, industries, and tenants also helps keep occupancy rates and collection rates steady -- especially for a company as large as Realty Income.
Convenience stores, dollar stores, grocery stores, drugstores, home improvement stores, and fast food restaurants account for roughly 43% of the company's annual income. The majority of these industries are cost focused or essential services and will do well even if the economy is tanking.
But aside from that, no single tenant accounts for more than 4% of its annual rental income, further reducing its risk exposure through diversification. The REIT's occupancy has never fallen below 96%, with its historical average sitting at just over 98%.
Realty Income's dividend is well covered
Normally, a yield of 5% (which is nearly triple the S&P 500 average) could indicate that a company carries elevated risk. But that's not the case with Realty Income. Its balance sheet is strong, with the company boasts a high investment-grade credit rating, stable debt ratios, and $1.6 billion in liquidity.
A healthy balance sheet is an important indicator of whether the company can sustain its payouts moving forward. And clearly, Realty Income is at no risk of a dividend cut in the imminent future. In fact, its dividend payout ratio of 72% indicates the company still has plenty of coverage to maintain its dividend and keep its raises going.
The key to its nearly 30-year history of raising its payouts is that the company doesn't do massive dividend increases each quarter like a lot of other high-yield dividend stocks. Instead, it pays its dividends monthly, focusing on small, manageable increases made consistently.
In total, its dividend has increased at an annual clip of 4.4% since 1994, which is impressive over such a long period of time.
The company is still growing
Realty Income went on a major shopping spree from 2019 to 2022, spending more than $21 billion on expansion. The company is scaling back its acquisition and development spending compared to recent years, but the company is still growing.
It just announced plans to acquire 415 single-tenant convenience stores across the U.S. from U.K.-based investment firm EG Group. It also just completed the sale-leaseback agreement for a gaming resort, which will be accretive to the company in the first quarter of 2023.
Growth is important for Realty Income because it helps it sustain its healthy payout ratio by increasing things like net operating income (NOI) and funds from operation (FFO), critical metrics for a REIT's profitability. Given its attractive yield, safe business model, and reliable history of dividend growth, it's a no-brainer buy for investors seeking income safety.