Realty Income had every a dividend investor wants: a high yield, strong finances, and solid growth prospects.
Realty Income (O 2.00%) is a boring company, which is something that conservative dividend investors should find very attractive. That’s because this “boring” company happens to offer a hefty 5.6% dividend yield. It is a great sleep-well-at-night investment selection.
To back that statement up, check out these three reasons to love this high-yield real estate investment trust (REIT).
1. Realty Income is large and diversified
Realty Income is a net lease REIT, which means that its tenants are responsible for most property-level operating expenses. But it owns single-tenant assets, so this actually means there’s a fair amount of risk at each property. That risk is mitigated by the fact that Realty Income owns more than 15,400 properties. It is one of the largest REITs in the world.
Image source: Getty Images.
It is also one of the most diversified REITs in the world. Although the U.S. market is the largest in the portfolio, Realty Income invests across eight countries. It has been expanding that list as it reaches further and further into the European market.
Adding to that, Realty Income also spreads its portfolio across different property types, with the heaviest exposure to retail and a smaller position in industrial assets. It also has a fairly large “other” category, where it invests in property types like casinos and vineyards. Diversification helps to limit risk, but it also provides the REIT with additional levers to pull for growth.
2. Realty Income is financially strong
The biggest testament to Realty Income’s financial strength is probably its three-decade-long streak of annual dividend increases. You simply can’t achieve that kind of consistency without a strong foundation and a solid business model.
However, there’s more to look at here. For example, the adjusted funds from operations (FFO) payout ratio is roughly 75%, which means there’s plenty of room for adversity before a dividend cut would be on the table.
The dividend, meanwhile, is sitting atop an investment-grade-rated balance sheet. This is where the company’s size comes back into play. Being financially strong and large generally affords Realty Income greater access to capital markets than its peers. So it can raise the money it needs to support its business and dividend fairly easily — a competitive advantage that shouldn’t be overlooked.
3. Realty Income is executing well
The long history of annual dividend increases has already been noted as a sign of a strong and successful business. But there are others that should be considered, too. For example, Realty Income’s occupancy is solidly above the occupancy of the average REIT in the S&P 500 (^GSPC 0.38%). Even during the Great Recession, occupancy didn’t fall below 96%. This is a very strong portfolio.
O data by YCharts
But there’s another interesting statistic to consider: In the third quarter of 2024, Realty Income recaptured 105% of its expiring lease rents. Realty Income’s leases generally include regular rent increases, so this basically means that its properties are so desirable that tenants are willing to pay even more than they had been to stick around, or that new tenants are willing to pay more than older ones to get into one of the REIT’s properties. That’s a clear sign that management is doing a good job of selecting assets.
A reliable dividend stock
All that said, Realty Income isn’t going to excite you. For example, the dividend growth rate here is likely to be in the low-to-mid single digit percentages, just as it has in the past. But when you add that to the financial strength, diversification, strong operating history, and, of course, lofty yield, you can see why conservative dividend investors should have Realty Income on their wish list, if not in their portfolio.