Investing in higher-yielding dividend stocks has its benefits and drawbacks. On the plus side, these companies pay lucrative dividends, making them ideal for income-seeking investors. However, many have higher risk profiles, which can cause them to cut their payouts if they run into financial trouble.
The risk of a dividend cut isn’t something that Realty Income (O 0.59%) investors need to worry about. Instead, the high-yielding (5.8% current yield) real estate investment trust (REIT) should be able to continue its impressive streak of increasing its dividend. Because of that, income-seeking investors won’t regret buying shares in February.
A high-quality, high-yielding payout
Realty Income is on a mission to pay a dependable monthly dividend that grows over time. The REIT has certainly achieved that objective over the years. It has raised its payout for 30 straight years, growing its dividend at a 4.2% compound annual rate. The company has increased its dividend 128 times since coming public in 1994, including the past 109 quarters in a row.
The REIT’s backbone is its high-quality real estate portfolio. Realty Income owns about 15,450 retail, industrial, gaming, and other properties across the U.S. and Europe net leased to many of the world’s leading companies. Net leases produce very durable rental income because tenants cover all operating costs, including routine maintenance, real estate taxes, and building insurance.
It focuses on owning properties leased to high-quality tenants in very resilient industries, like grocery, convenience, dollar, and home improvement stores. About 90% of its rent comes from tenants in sectors resilient to economic downturns and isolated from the pressures of e-commerce.
Realty Income compliments its rock-solid real estate portfolio with a strong financial profile. The REIT has a reasonable dividend payout ratio (75% of its adjusted funds from operations, or FFO). That gives it lots of breathing room while allowing it to retain meaningful excess free cash flow to fund new income-generating property investments. Realty Income also has an elite balance sheet.
It’s one of only eight REITs with two A3/A- bond ratings or better. These features give the company a lot of financial flexibility to continue investing in income-producing properties.
Well positioned to continue expanding
Realty Income has grown significantly over the years by investing in additional income-generating real estate. The company purchases properties in sale-leaseback transactions with owner-operators, buys net-leased real estate portfolios from other investors, and acquires other REITs focused on net-leased real estate. It will also invest in developing properties for its clients.
The REIT has grown its adjusted FFO per share by around 5% annually over the past three decades. It’s in an excellent position to continue growing around that same yearly pace. It has multiple funding sources to invest in more income-generating real estate, including post-dividend free cash flow, issuing debt, selling stock, and its recently launched private capital fund platform.
Meanwhile, Realty Income has a massive and growing total addressable market opportunity. It sees a $5.4 trillion total addressable market for net lease real estate in the U.S. and another $8.5 trillion opportunity in Europe. The company’s opportunity set has grown as it has expanded its investment reach.
For example, it has recently added gaming ($300 billion U.S. market opportunity) and data centers ($100 billion of existing and $400 billion in development opportunities in the U.S. market) to its portfolio. The company has also expanded into several new European countries, adding $5.9 trillion to its market opportunities overseas.
Realty Income has also launched new platforms to enhance its ability to invest. It launched a credit investment platform that has opened the door to additional investment opportunities. For example, it invested $950 million into The Bellagio Las Vegas in 2023 via a $300 million joint venture (JV) investment and a $650 million preferred equity interest in that JV.
Meanwhile, the company’s new private capital strategy has opened up the $18.8 trillion private real estate investment market. This strategy should supply it with greater access to capital and management fee income while enhancing its investment returns.
A dependable income stock
Realty Income has demonstrated the dependability of its dividend over the past 30 years. The REIT has built a high-quality portfolio backed by a strong financial profile, which supports its high-yielding dividend. The company has the financial flexibility and opportunity set to continue growing its portfolio and payout in the future. Because of these features, income-focused investors likely won’t regret buying shares of the REIT this month.
Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
