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This ultra-cheap stock has increased its dividend for more than 25 consecutive years. Here’s why it’s worth checking out right now.
Real estate income (NYSE: O) is one of the largest and most popular real estate investment trusts, or REITs, on the market. The company owns a portfolio of nearly 15,500 properties across the United States and Europe and has paid 647 consecutive monthly dividends to investors.
Built for steady, growing income over time, Realty Income has an excellent track record of smart capital allocation and extraordinary returns. And now is a rare opportunity to buy this proven winner on sale.
The Realty Income Business: The Short Version
Realty Income specializes in net lease propertieswhich essentially means most types of single-tenant commercial properties. About 80% of the company’s rental income comes from retail properties, but don’t let the term “retail” scare you: Realty Income has been producing steady, growing income year after year for two main reasons.
First, most of Realty Income’s tenants are either recession-resistant, not vulnerable to e-commerce competition, or both. Specifically, most properties fall into one of four categories:
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Non-discretionary retailers, such as pharmacies, that sell things people need.
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Discount-seeking retailers, such as warehouse clubs and dollar stores, offer bargains that e-commerce retailers can’t match.
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Service-based retailers, such as fitness centers that sell a service or experience rather than a physical product.
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Non-retail businesses, including industrial, gaming and agricultural properties, which collectively account for approximately 20% of the company’s rent.
Second, the net lease structure is designed for consistency and steady growth. Realty Income leases typically have an initial term of a decade or more, with annual rent increases built in. The net lease structure means that tenants are required to cover property taxes, building insurance, and most maintenance items.
In other words, tenants cover the variable expenses of owning real estate. All Realty Income has to do is buy a property with a high-quality tenant in place and collect predictable, growing income year after year.
Realty Income has an excellent track record of making smart capital allocation moves, and as one of the few REITs with an A credit rating from both Moody’s and Standard & Poor’s, it has a competitive advantage when it comes to raising debt capital.
A stellar track record
The proof is in the performance. While Realty Income is well below its highs now, the stock has still generated an annualized total return of 13.6% since its NYSE listing in 1994. To put that in perspective, consider that a $10,000 investment in Realty Income 30 years ago would be worth about $470,000 today, more than double what a $10,000 investment in Realty Income would be worth today. S&P 500 Index index fund would have produced.
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The Total Return Level Chart
For income investors, Realty Income not only has a dividend yield of just under 6% at the time of writing, but it has also increased its payout for an impressive 107 consecutive quarters. Assuming dividend reinvestment, someone who invested $10,000 in Realty Income’s IPO in 1994 would be receiving $28,200 in annual dividend income today. Think about that for a second: Early investors in Realty Income are receiving nearly three times their original investment in annual dividend income today.
Because now?
The short answer is that Realty Income is a business that works in any economy, and right now the stock is historically cheap. Despite steady earnings growth, Realty Income is trading about 33% below its all-time high. Aside from a small bump in the early days of the COVID-19 crisis, the last time Realty Income had a dividend yield this high was more than a decade ago.
With interest rates widely expected to begin falling later this year, and continue to normalize for the next few years, it could be a strong environment for REIT investors in the years ahead. And Realty Income has a proven track record of outperforming the S&P 500, especially during falling rate environments.
Should You Invest $1,000 in Real Estate Income Right Now?
Before you buy Realty Income stock, consider the following:
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This ultra-cheap stock has increased its dividend for more than 25 consecutive years. Here’s why it’s worth checking out right now. was originally published by The Motley Fool