Updated May 6, 2021 by Bob Ciura

When it comes to dividend growth stocks, the Dividend Aristocrats are the crème de la crème. These are stocks in the S&P 500 index with dividend increases for more than 25 consecutive years. For this reason, we recommend long-term investors looking for the best stocks. First, consider the Dividend Aristocrats.

We have compiled a list of all 65 Dividend Aristocrats along with relevant financial metrics such as dividend yield and P / E ratio. You can download the full list of Dividend Aristocrats by clicking the link below:

At the same time, Real Estate Investment Trusts (REITs) seem to be a matter of course for the Dividend Aristocrats. REITs must distribute at least 90% of their earnings to shareholders, which results in steady dividend growth for the asset class, provided earnings grow over time.

Still, there are only three REITs on the Dividend Aristocrats’ list: Federal Realty Investment Trust (FRT), Essex Property Trust (ESS), and Realty Income (O). The reason for the relative lack of REITs in the Dividend Aristocrats Index is mainly the high payout requirement of REITs. It is difficult to increase dividends year after year when the bulk of income is paid out as it leaves little room for error.

Realty Income has a very impressive dividend history, especially for a REIT. Realty Income is a dividend aristocrat. It’s also a monthly dividend stock, meaning it pays shareholders 12 dividends per year instead of the typical quarterly payment schedule.

This article discusses this dividend aristocrat in more detail.

Business overview

Realty Income was founded in 1969. It’s a retail-focused REIT, known for its successful dividend growth and monthly dividend payments, and even calling itself “The Monthly Dividend Company”. The trust uses a highly scalable business model that has enabled it to grow into a massive landlord with more than 6,600 properties. Realty Income is a large-cap stock with a market cap of $ 26 billion.

While many retail landlords are struggling in the age of Amazon (AMZN) and e-commerce, Realty Income continues to thrive as it owns retail properties that are not part of a larger retail development (e.g. a mall) but are stand-alone properties. This means the properties are suitable for a wide variety of renters including government services, healthcare services, and entertainment.

In fact, Realty Income has a highly diversified portfolio by industry, tenant and geographic location. The vast majority of the rent comes from e-commerce and recession-resistant tenants, making it a good substitute for bonds. The company is also exposed to industrial, office, and farm tenants, although retail stores still make up the majority of its rental income. The company generates rental income from all over the US and the UK and isolates itself from regional challenges.

Source: Investor Presentation

The REIT’s business model is quite simple and has delivered spectacular results over the long term. Realty Income purchases well-located commercial properties, remains disciplined in making acquisitions, enters into long-term net leases, and actively manages the portfolio to maximize value. It also maintains a conservative balance sheet with a laser-like focus on Funds from Operations (FFO) growth per share and monthly dividend payments to investors.

The results of this model speak for themselves: 15.2% average total annual return since listing on the New York Stock Exchange in 1994, a lower beta (a measure of stock volatility) than the S&P 500 over the same period, and positive Earnings per share growth for 24 of the last 25 years.

Growth prospects

The trust’s history of growth is remarkable. Annual growth – driven by slow but steady annual rent increases and a consistently strong acquisition pipeline – has been very consistent across economic cycles, making it a spectacular dividend growth stock.

Realty Income’s future growth will be driven by its proven, highly scalable business model, access to substantial low-cost capital, and extensive network of relationships with a wide variety of tenants. Acquisitions have been an integral part of Realty Income’s growth for many years.

Source: Investor Presentation

The annual rent increases are small, which makes organic growth very slow. As a result, it must find a way to keep acquiring enough properties to keep the needle moving in a meaningful way.

The good news is that the low cost of capital (via equity issues above net asset value and low interest rates thanks to the A rating) allow it to deploy capital accurately despite compressed cap rates. However, if management does not pursue these efforts, it is very possible that investors will experience significant multiple contraction to adjust to falling growth expectations.

In the most recent quarter, Realty Income beat analysts’ estimates for both revenue and FFO per share. Sales rose by 6.8% compared to the same quarter of the previous year due to property acquisitions and rent increases. Adjusted FFO per share decreased by 2.2% due to a higher number of shares.

Future growth remains likely as the company’s acquisition pipeline is robust. Last quarter, Realty Income iinvested $ 1.03 billion in real estate and properties under development or expansion, including $ 403 million in the UK Properties.

Competitive advantage and recession performance

One way REITs gain a competitive advantage is by investing in portfolios of the highest quality. Realty Income has achieved this by building a broadly diversified portfolio of well-located properties with many high-quality tenants.

Property income also benefits from a favorable economic environment with high occupancy and the ability to increase rents over time.

Another – and perhaps biggest – competitive advantage for Realty Income is its extremely strong balance sheet. With an A- credit rating from Standard & Poor’s – which has a solid investment grade rating and a high rating for a REIT – the company can unlock value on large acquisitions by simply increasing the existing debt on the properties it acquires too significantly lower interest refinance rates.

As a result, it is able to profitably invest in high quality assets that many of its competitors couldn’t. This gives him the ability to build a stronger portfolio while having more leverage for growth, which brings superior risk-adjusted returns to shareholders.

As history has shown, these competitive strengths enable Realty Income to perform well in the worst economic recessions. For example, FFO per share rose 2.1% on an annualized basis during the Great Recession (2007-2009) and occupancy remained extremely resilient throughout the period.

This was a remarkable achievement and speaks volumes about the strength of the business model. We expect Realty Income to hold up similarly well in the next downturn and in fact it will likely give the trust an opportunity to replenish its growth pipeline as it will likely use its strong balance sheet to buy discounted property.

Valuation and expected return

Based on our expected Adjusted FFO per share of $ 3.46 in 2021, Realty Income’s stock trades at a price to FFO of 19.4. Investors can think of this as value for money. Our fair value estimate is a P / FFO ratio of 18, which means the stock is currently slightly overvalued.

A falling P / FFO ratio could lower the annual return by 1.5% per year over the next five years. Future returns are therefore a mix of FFO growth (estimated 4% per year) and dividends (current rate of return 4.2%), resulting in expected annual returns of 6.7% per year.

The current dividend yield of 4.2% is well above the S&P 500 average, and the company has done an excellent job of growing its dividend payout over time. Realty Income has paid over 600 consecutive monthly dividends without interruption, increasing the dividend over 100 times.

Final thoughts

Investors flock to REITs for dividends, and with high returns across the asset class, it’s easy to see why they’re so popular with high-income investors.

We’ve compiled a list of 150+ REITs that are worth considering given their dividend yields and dividend growth potential. You can find our entire REIT list here.

Realty Income is slightly overvalued right now and offers investors decent, if unspectacular, total return potential. However, we believe the stock remains extremely attractive to high-income investors looking for a secure payout with steady dividend growth.

Thank you for reading this article. Please send feedback, corrections, or questions to [email protected]


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