Could Buying Realty Income Stock Today Set You Up for Life?

Do you ever wonder if there’s an easier way to build a nest egg than with growth stocks? They’re certainly up to the task, but finding the right ones and then keeping tabs on them can be a lot of work. Never even mind their frequent volatility.

Well, there is an easier (and less sea-sickening) way. If you have a bit of patience, a handful of dividend-paying stocks are just as capable of turning a little money now into small fortunes in the future. Realty Income (O 0.58%) is one of the best of these bets.

One of the market’s best-kept secrets

Never heard of Realty Income? It wouldn’t be surprising if you hadn’t. The organization isn’t a tech behemoth, nor does it make any products or sell any services directly to consumers. In fact, it’s anything but a typical company. Realty Income is actually a real estate investment trust, or REIT, for short. That just means it owns a portfolio of rental real estate and passes along the bulk of its rental profits to shareholders.

Even by REIT standards, Realty Income is a curious standout. While other such entities hold obvious properties like apartment complexes, hotels, and office buildings, Realty Income’s specialty is retailing. It owns 15,450 different consumer-facing storefronts rented to tenants like Walmart, Tractor Supply, and convenience store chain 7-Eleven. It’s single-biggest renter is Dollar General, followed closely by Walgreens and Dollar Tree.

At first blush it seems risky. Most retailers are reportedly on the ropes, struggling to fend off the ongoing growth of e-commerce. That’s not necessarily reality, however.

While certainly some retailers are being forced to rethink their brick-and-mortar footprints, Realty Income’s tenants are among the more resilient players in the business. They’ll typically only open a store if there’s good reason to believe the investment will pay off. They’ve also got the financial wherewithal to continue making rent payments even when things get tough.

That’s what the REIT’s occupancy rate suggests anyway. It was 98.8% as of the end of June. Then again, Realty Income’s occupancy rate never dipped below 97.9% even at the peak of the COVID-19 pandemic’s impact in late 2020. This resiliency is how the company not only managed to pay a dividend every month (yes, a monthly dividend since its inception in October of 1994) but raise its dividend payment every quarter for the past 108 quarters. That’s 27 straight years’ worth of quarterly growth of its monthly dividend.

That’s also the secret sauce behind this seemingly mundane stock’s incredible net returns to patient shareholders.

Slow and steady won the race

Investors tend to categorize stocks into two distinct categories, each with its own attributes. Growth stocks of course represent companies in growth industries (like technology) but aren’t known for their dividends. Dividend stocks also tend to be value stocks, which typically come from slower-moving sectors such as consumer goods and utilities.

Not all dividend-paying stocks, however, are incapable of producing the sort of returns you’d normally expect from growth stocks. This growth is simply achieved in a different way. Instead of price appreciation, slow-and-steady dividend growth — and the reinvestment of those dividends in more shares of the stock paying them — can drive meaningful net growth as well.

That’s certainly true of Realty Income anyway. As the chart below shows, had you reinvested all the continually growing dividends dished out by a $10,000 investment made in this REIT 30 years ago, today your position would be worth a little over $550,000. Had you not reinvested these dividends, mere price appreciation would only leave you with a tad less than $80,000.

O data by YCharts

The graph above comes with an important footnote. That is, the bulk of the net gains materialized in the last one-third of the 30-year holding period. That’s how compounding works. More and more shares dish out more and more per-share dividends. It just takes some time for either to become significant. Once at the proverbial tipping point, it all starts snowballing very quickly.

You should also be aware that dividends are taxable in the year in which they’re paid. While the chart above doesn’t show any impact of taxation, this can obviously reduce your overall net returns if the position is held outside of an individual retirement account (IRA).

Still, this is an interesting and compelling return, confirming that it is possible for a slow-and-steady, dividend-oriented investment to produce growth-like results. Realty Income reports that since 1994 reinvesting its dividend payments in more shares of the stock has resulted in a compound annualized return of 13.5%. That’s a better than many popular growth stocks have achieved.

Patience is required but not difficult to muster

So to answer the question, yes, buying Realty Income stock today can set you up for life. The key to it doing so, however, is trusting in the REIT — as well as in the process — enough to not only hold onto it for a few decades but continue reinvesting its dividend payments even when it’s uncomfortable to do so.

Of course, given the nature of its business and its tenant list, it’s not like doing so is a huge leap of faith. This company seems to have mastered the art and science of renting retail space.