Why I Just Bought More of This Magnificent 5.7%-Yielding Dividend Stock (and Why I’ll Continue Buying in May)

I have been steadily building a position in dividend powerhouse Realty Income (O 1.12%) over the past few years. I recently bought some more shares and plan to do that again this May. Here’s why I can’t seem to get enough of this magnificent dividend stock these days.

A premier passive-income producer

The biggest reason I have been buying Realty Income is to collect more of its attractive monthly dividend. The real estate investment trust (REIT) currently yields 5.7%. That’s several times above the S&P 500‘s 1.4% dividend yield.

That sizable payout is on an extremely firm foundation. Realty Income’s diversified portfolio of net-lease real estate generates very durable income. The lease structure requires that tenants cover maintenance, real estate taxes, and building insurance. The REIT also focuses on properties leased to tenants in industries relatively immune to economic downturns and the pressures of e-commerce, like grocery stores, warehouses, and home improvement stores.

Meanwhile, the company has a conservative dividend-payout ratio for a REIT (about 75% of its adjusted funds from operations, or FFO). That enables it to retain over $800 million annually to help fund new investments. It complements that with an elite balance sheet (it has a low leverage ratio and A-rated credit).

Realty Income’s strong financial foundation enables it to steadily expand its portfolio by acquiring additional income-generating properties. That helps grow its sources of stable cash flow, allowing it to steadily increase its dividend. The REIT has raised its monthly payment 124 times since going public in 1994 (including for the last 106 straight quarters). It has grown the dividend at a 4.3% compound annual rate.

An attractive value

Investors can buy this high-quality, income-generating machine for a great value these days. Shares of Realty Income have fallen more than 10% over the past year (and are down nearly 30% from their peak in 2022). Higher interest rates are the primary factor weighing on its stock. They’ve made borrowing money more expensive for REITs like Realty Income. Higher rates also weigh on the value of real estate because those increase the income yield to make it more competitive compared to lower-risk investments like bonds and CDs.

The slump in Realty Income’s stock price has driven down its valuation. The REIT expects to grow its adjusted FFO by 3.3% to 5.3% this year to a range of $4.13 to $4.21 per share. With the stock recently around $54, Realty Income trades at about 13 times its FFO. That’s much cheaper than its historical average (which is why the dividend yield is above its 4% to 5% average range). It also has a much lower valuation than the broader market (the S&P 500’s forward price-to-earnings (P/E) ratio is nearly 21 times).

Lots of growth ahead

Realty Income believes it can grow its adjusted FFO per share by 4% to 5% annually over the long term. The company expects to use a combination of post-dividend free cash flow, balance sheet capacity, and stock sales to fund enough new investments to deliver mid-single-digit cash flow per-share growth.

There should be an abundance of investment opportunities. It estimates the potential market opportunity for net-lease real estate in the U.S. and developed European markets is nearly $14 trillion. Meanwhile, it has been enhancing its opportunity set by expanding into new verticals like data centers, gaming properties, additional European markets, and credit investments. Because of that, it has a long growth runway ahead.

A trio of return drivers

Realty Income pays a nearly 6%-yielding dividend, giving investors a strong base return. Meanwhile, it expects to grow its adjusted FFO at a 4% to 5% annual rate (which should allow it to continue increasing the dividend). Those factors give it a built-in total-return potential of more than 10% annually. Add the upside potential of a rising valuation as interest rates fall, and Realty Income could produce even higher total returns in the coming years. That combination of income, growth, and upside potential is why I keep piling into this magnificent REIT.