Posted on June 8th, 2021 by Bob Ciura
Investors interested in owning stocks for income can easily get hold of real estate investment trusts or REITs. These stocks give investors the opportunity to own a trust that rents property and returns essentially all of its profits to shareholders in the form of dividends.
Realty Income (O) has a dividend yield of 4% and an exceptional dividend history. And Realty Income pays its shareholders monthly instead of quarterly, which enables investors to grow their wealth faster.
There are only 53 companies that pay monthly dividends. You can download our full Excel spreadsheet of all monthly dividend stocks (along with key metrics like dividend yield and payout ratio) by clicking the link below:
This article discusses Realty’s business model, growth prospects, and dividend in detail.
Realty Income is a retail-focused real estate investment trust that has built an excellent reputation for its dividend growth. Part of its attractiveness certainly lies not only in the actual payout history, but also in the fact that these payouts are made monthly instead of quarterly.
In fact, Realty Income has declared 611 consecutive monthly dividends, a track record unparalleled among monthly dividend stocks.
The trust owns more than 6,500 properties and has a market capitalization of over $ 25 billion. For example, Realty Income focuses on standalone properties rather than those associated with a mall. This increases the flexibility of the tenant base and helps the trust to diversify its customer base.
has increased its dividend 100 times since it went public in 1994. Realty Income is a member of the Dividend Aristocrats.
The company’s long history of dividend payments and increases is due to its high quality business model and diversified real estate portfolio.
Source: Investor Presentation
Last quarter, Realty Income outperformed analysts’ estimates for both revenue and FFO per share. Sales rose 6.8% compared to the same quarter of the previous year due to property purchases and rent increases. Adjusted FFO per share decreased by 2.2% due to a higher number of shares.
Realty Income’s growth has been fairly constant; The trust has a very long history of growing its asset base and average rent, which together have fueled FFO per share growth. We do not believe that this has changed and therefore see the growth capacity in the mid-single-digit range every year, as it has for many years.
Realty Income will achieve these results by simply doing what it always has been doing.
Realty Income has reduced its exposure to lower quality tenants. Today, 50% of its sales come from investment-grade tenants, and it has reduced its reliance on restaurants, favoring convenience stores and grocery stores instead.
Source: Investor Presentation
The Trust’s tenant list is a high quality, diversified group whose main commitment remains Walgreens Boots Alliance (WBA), one of the largest drug stores in the world. Even then, its largest tenant only accounts for 5.5% of total sales.
The 20 largest tenants account for over 50% of sales. The same applies to geographical diversification.
This diversification, as well as the industry composition, helps Realty Income reduce its risk from sector downturns and enables it to achieve long-term growth.
All of this has resulted in Realty Income’s results being truly stellar over time. Realty Income has never had a year-end occupancy rate of less than 96.6%, which is an incredible track record in terms of persistence as that period includes the dot-com bubble as well as the financial crisis and subsequent recessions. The occupancy rate was 98% in the first quarter of 2021.
The same rental growth has been almost always positive as well, meaning Realty Income is generating more income from its portfolio over time. Due to the long-term rental agreements, the annual volatility of the rental conditions is also relatively low. This helps in achieving higher base rents, which drives organic sales growth.
When you put all of this together, we see that Realty Income has achieved 4% annual FFO-per-share growth over time, which is in line with its recent history.
Realty Income’s dividend history is second to none in the REIT world. The dividend has increased more than 100 times since it went public in 1994, and the payout has increased an average of 4.4% per year.
The dividend is safe too, considering not only this extraordinary history of distribution under all economic conditions, but also because the trust pays out just over 80% of the Adjusted FFO.
REITs have to pay out most of their income in the form of dividends, so Realty Income’s dividend payout ratio will never be low. We consider ~ 80% of FFO for a REIT to be strong, especially one that is consistently growing FFO per share.
That means the dividend will be sustainable even if the FFO per share stagnates for some time. We assume that, as it has for many years, the dividend will increase annually in the low to mid single-digit range.
Realty Income holds this record not only because its business is fundamentally superior, but also because its capital structure is conservative.
Source: Investor Presentation
The trust has strong investment grade ratings. This means the trust spends relatively less on debt servicing and while the dilution has been little headwind over time, the formula clearly works.
It also has a net debt to EBITDAre ratio of 5.3x and a weighted average life of 8.7 years. In other words, liquidity and leverage are not an issue for Realty Income, which adds to the stock’s appeal for income investors.
REITs are the favorites among dividend investors as they distribute the vast majority of their profits to shareholders through dividends, which usually results in high returns.
Realty Income’s current 4% yield is lower than many REITs, but that’s because the trust has a track record that is second to none. This causes investors to pay a premium for the stock, which decreases the return.
However, for income investors looking for double the return of the broader market and a secure payout, Realty Income is the place for you. This isn’t a growth stock, but from a pure current income and dividend growth standpoint, Realty Income is hard to beat.
The valuation is a bit high at ~ 20x this year’s expected FFO per share, while we estimate the fair value at 18x FFO. As a result, the increased valuation of Realty Income could limit total returns for the next several years. That said, Realty Income is arguably the best monthly dividend stock for business quality and dividend security.
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