When it comes to investing in real estate investment trusts (REITs), diversification is important. For example, my hotel REITs thrive in strong economies, but my medical office REITs generate steady and predictable income even in tough times. As of this writing, I own 15 different REITs in my personal stock portfolio, so it's fair to say I'm a fan of not tying my portfolio's performance to any single one.
With that in mind, if I had to choose just one REIT to own, I'd have to go with the very first one I ever bought, and that's Realty Income Corporation (NYSE: O). One of the largest stock positions of any kind in my portfolio, Realty Income is a cornerstone of my long-term investment strategy -- and one that allows me to sleep well at night while generating strong income and growth.
Realty Income in a nutshell
Realty Income is a net lease REIT specializing in retail properties. If you aren't familiar, a net lease is a type of commercial leasing agreement under which tenants agree to long-term leases (usually 10 years or more) with annual rent increases built in. And unlike residential leases, net lease tenants agree to cover property taxes, insurance, and maintenance -- the variable costs of property ownership. Net leases can technically be used on most types of commercial real estate, but they are most common in single-tenant buildings.
As of the end of the first quarter, Realty Income owned more than 6,600 such properties in all 50 states, Puerto Rico, and the United Kingdom. More than 80% of the tenants are retail in nature, and some of the largest include Walgreens, 7-Eleven, Dollar General, and FedEx. The company also has smaller portfolios of industrial, office, and agricultural properties.
In addition to the net lease structure, which is designed for steady, growing income over long periods of time, the other reason Realty Income is a great "forever" REIT is that its tenants are extremely resilient as a group. Most of its tenants fall into one or more of these three categories:
- Non-discretionary: Businesses that sell things people need. Walgreens and 7-Eleven are great examples. These are highly recession-resistant businesses.
- Service-based: Businesses that sell a service as opposed to tangible goods. These are naturally resistant to e-commerce competition. LA Fitness is a good example from Realty Income's tenant list.
- Discount-oriented: Businesses that focus on deeply-discounted merchandise tend to compete well against e-commerce and thrive during recessions. Dollar stores are a great example, and warehouse clubs are also in this category.
The proof is in the numbers
Realty Income's track record of income and growth speaks for itself. The company has paid 610 consecutive monthly dividends to investors (that's nearly 51 years) and has increased the payout for the past 94 quarters in a row -- including throughout the financial crisis as well as the COVID-19 pandemic. Its dividend yield of about 4.1% is well above the S&P 500 average, and there's no reason to believe the income growth will be in jeopardy anytime soon.
However, Realty Income isn't just about the dividend. Its stock price has done quite well too. Since its 1994 listing on the NYSE, Realty Income has produced a 15.2% annualized total return for investors. Shareholders who got in back then and reinvested their dividends along the way are sitting on a 4,530% total return -- more than triple that of the S&P 500 over the same period.
A trifecta of performance
Most REITs pay excellent dividends, but Realty Income takes income reliability and growth to another level. And not only is it a great income stock, but it also has a fantastic track record of creating stock appreciation for its investors over the long run.
So, we have great income, strong growth potential, and limited risk. That's the trifecta of what I look for from a REIT and why I have quite a bit of my own savings invested in Realty Income.