If you are a conservative investor looking to generate a reliable income stream from your portfolio, then Realty Income (NYSE:O) needs to be on your short list. Although the stock is almost never cheap, it looks like it’s fairly valued right now and definitely worth a close look for those who favor safe investments.
Here’s a quick review of the key things to like about this bellwether real estate investment trust (REIT).
1. Net lease
As a real estate investment trust, Realty Income’s basic structure is designed to own rental properties and pass on income to investors. The company’s approach in the space is what’s known as net lease. Essentially, this means it owns single-tenant properties, but its tenants are responsible for most of the costs of the assets they occupy. It is generally considered a low-risk way to invest in real estate, with Realty Income basically just sitting back and collecting rent checks.
That’s an oversimplification, of course, but directionally correct. The key is that the REIT doesn’t take on the risk of managing the asset directly, which would lead to a host of variable costs and potential business disruptions. The value of this approach was on display in 2020 with the pandemic-driven need to augment cleaning regimens.
2. An industry giant
Realty Income happens to be one of the biggest players in the net lease space, with a portfolio of nearly 6,600 properties. This gives it a large footprint over which to spread risk, with no single property accounting for a material piece of its overall rent roll. To be fair, being so large, it is hard for the REIT to grow quickly. But for risk-averse investors, Realty Income’s slow and steady approach will likely be just fine.
3. Spreading its bets
In addition to having a large number of properties, Realty Income has a little diversification thrown into the mix, as well. Although retail assets make up 84% of its rent roll, it also owns industrial (11% of rents) and office assets (3%), and an opportunistic vineyard investment makes up the rest.
Within the retail segment, meanwhile, the portfolio is spread across various sub-sectors with a heavy focus on countercyclical businesses that are resistant to e-commerce and have stable cash flows, like quick-serve restaurants, convenience stores, and drug stores. About half of its rent roll is tied to investment-grade tenants.
And on top of all that, Realty Income has recently started to invest in Europe (roughly 6% of rents) to further diversify its portfolio and to find a new market in which it can grow. As a risk-averse investor, you know that diversification is good for your portfolio — it’s also good for a REIT’s portfolio.
4. Returning cash to investors
Because Realty Income is a REIT, a huge portion of the return investors can expect from the stock will come in the form of dividends. On that front, there’s a lot to like.
Although there are other REITs with dividend yields higher than the 4.2% recently on offer here, Realty Income’s yield is still more than twice what you would get from an S&P 500 index fund. It’s also roughly in the middle of the REIT’s yield range over the past decade, suggesting that Realty Income is fairly valued right now. While value investors might not find that appealing, this REIT rarely goes on sale, so fair is actually a pretty good deal.
That’s buttressed by some other dividend facts. For example, the company has increased its dividend every single year for 25 consecutive years, which makes it a Dividend Aristocrat. Within that streak is an over 90-quarter streak of quarterly dividend increases. And the dividend is paid monthly, so it’s kind of like replacing a paycheck. The annualized dividend growth rate over the past decade was a touch under 5%, with more recent periods in the 3% space. So don’t expect rapid dividend growth, but slow and steady is probably just fine for most conservative investors.
Boring can be beautiful
The truth is that Realty Income is a pretty uneventful REIT to own, with a heavy focus on being a reliable dividend payer. In fact, the company has trademarked the nickname “the Monthly Dividend Company.” If you are looking for a safe stock with a material and above market yield, you probably can’t do too much better than this REIT industry giant.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.