This “Monthly Dividend Company” Offers Reliable Income and Upside Potential

Dhaneshwar Prasad

Realty Income Corporation (NYSE: O) is an attractive investment for income-oriented investors looking to add real estate exposure to their portfolios.

As a real estate investment trust (REIT), Realty Income must pay out at least 90% of its taxable income as dividends to shareholders.

This results in a consistently high dividend yield along with the potential for capital appreciation over time.

Overview of Realty Income

Founded in 1969, Realty Income is a triple-net lease REIT that owns over 11,087 commercial properties across the United States and Europe. The company focuses on acquiring high-quality real estate leased to quality tenants under long-term net lease agreements.

This means the tenants pay their rent plus taxes, maintenance, and insurance costs associated with the property. So Realty Income receives steady rental income each month.

The portfolio is highly diversified with properties spread across key property types:

  • Retail (63% of rental revenue)
  • Industrial (24%)
  • Office (5%)
  • Agriculture (2%)
  • Gaming (2%)
  • Other (4%)

No single tenant accounts for more than 7% of total rental revenue, providing safety against tenant-specific risk. Walgreens is the largest tenant, contributing 6.7% of rental revenue.

Reliable Monthly Dividends

Realty Income proudly brands itself as “The Monthly Dividend Company” due to its impressive track record of declaring and paying dividends every month. The company has paid 615 consecutive monthly dividends and increased its dividend 115 times since going public in 1994.

According to NASDAQ (as of 29 December, 2023), the monthly dividend currently stands at $0.256 per share, amounting to $3.072 per share on an annualized basis. At the current share price around $60, this translates to an attractive dividend yield of 5.3%.

The payout ratio stands at a healthy 83% of adjusted funds from operations (AFFO), indicating the dividend is quite safe with room for future growth. Given its excellent track record, Realty Income seems likely to continue delivering steady dividend increases over time.

Diversified Sources of Rental Income

A key advantage of Realty Income is the diversification across tenants, industries, and geographies. No single industry makes up more than 12% of total rental revenue.

The company primarily owns properties leased to retail tenants (63% of rents), including convenience stores, restaurants, theaters, and retail outlets. This provides exposure to the resilient retail real estate sector.

Other major industries in the portfolio include industrial (24% of rents) and offices (5%), providing a balanced mix. Realty Income derives 94% of rental income from the U.S. but is expanding internationally with 6% from the U.K. and Spain.

Management focuses on acquiring properties leased to tenants with recession-resistant business models in healthy industries. Top tenants operate in sectors like retail stores, distribution warehouses, drug stores, dollar stores, and convenience stores.

Strong Growth Track Record

Since 1994, Realty Income has increased its revenue from around $75 million to over $3.3 billion in 2022. It has a strong track record of acquiring new properties and leasing sites to drive steady growth in rental income and cash flow.

As of September 30, 2023, the occupancy rate stood at a healthy 98.8%. The weighted average lease term is 9.0 years, providing predictable revenue. Most leases have rent increases built-in, providing organic growth.

Realty Income also benefits from its size and scale. As one of the largest triple-net lease REITs, it has investment-grade credit ratings and access to low-cost capital to fund acquisitions. This fuels continued expansion and diversification.

Potential Risks

There are some risks to consider with Realty Income stock:

  • Rising interest rates could increase borrowing costs and weigh on property values
  • Inflation may drive up operating costs
  • Retail apocalypse fears if renters struggle during recessions
  • Integration challenges with international expansion

However, the high-quality property portfolio and strong balance sheet help mitigate these risks. The stock appears to offer an attractive risk-reward profile for conservative investors.

Reasonable Valuation

Realty Income trades at a price-to-AFFO (P/AFFO) ratio of 16.1 based on 2023 estimates. This seems reasonable given the defensive nature of the business and potential AFFO growth ahead.

The current annual dividend yield of 5.25% also offers an attractive starting income stream that should continue growing. Realty Income seems fairly valued compared to sector peers, offering a blend of income and moderate growth potential.

Should You Buy Realty Income Stock?

For investors seeking reliable dividend income and exposure to defensive real estate, Realty Income is an excellent choice. Key advantages include:

  • Monthly dividends with an excellent history of payouts and increases
  • Diversified high-quality property portfolio with recession-resistant tenants
  • Multiple avenues for steady AFFO and dividend growth
  • Reasonable valuation relative to peers

In today’s uncertain market environment, Realty Income stands out as a stable income generator. The stock should continue delivering a healthy income stream plus moderate capital appreciation over time. Realty Income deserves a spot in most diversified dividend portfolios.

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Former Sony professional turned multi-business owner and stock investor, Dhaneshwar leverages his MBA to produce market, IPO and biz content and personal investments on Modernagebank.com
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