It's tough to find a dividend stock with a better payment history than Realty Income (NYSE: O). I've tried. There are stocks that have paid dividends since the 1800s and have even longer streaks of increases, but it's important to consider the whole picture.
As of July, Realty Income will have made its 600th consecutive dividend payment (that's 50 years of monthly payments). And this payment will represent the 107th dividend increase since the company listed on the NYSE in 1994. The company increases its payout every quarter (for the last 90 in a row) and sometimes makes interim dividend increases as well. In all, Realty Income has grown its dividend at a 4.5% annualized pace in its history as an NYSE-traded stock.
Having said all that, it's important to keep in mind that Realty Income isn't just an income investment. From the time of its 1994 NYSE listing through the end of the first quarter of this year, Realty Income had generated a 14.6% annualized return for its shareholders -- and that was near the bottom of the COVID-19 market crash -- handily beating the S&P 500. That means a $10,000 investment in Realty Income in 1994 with dividends reinvested would have grown to nearly $325,000 today.
How does Realty Income produce steadily growing income year after year?
There are two main reasons why Realty Income has produced such steady income and growth over the years.
First, Realty Income is a net-lease real estate investment trust (REIT). This means that its tenants sign long-term leases (15-plus-year initial terms are common) with annual rent increases built in. And under the terms of a net lease, tenants are responsible for property taxes, insurance, and maintenance, thereby shifting the variable expenses to the tenant. All Realty Income has to do is put a tenant in place and enjoy years of steadily growing, predictable income.
The second and more important reason is the nature of the tenant businesses. Most of Realty Income's properties are occupied by retail businesses, but not just any retailers. The portfolio is hand-picked to include recession-resistant and e-commerce-resistant businesses. Just consider Realty Income's largest tenant categories:
- Convenience stores: Sells products that people need, like gas and grocery items. 7-Eleven is an example of a major Realty Income tenant.
- Drug stores: CVS (NYSE: CVS) and Walgreens (NASDAQ: WBA) are both on Realty Income's top tenant list, and these are businesses that clearly sell essential goods.
- Dollar stores: Businesses that sell things at deeply discounted prices offer bargains online retailers can't typically match, and they also tend to hold up well in recessions.
- Grocery stores: Perhaps the most obvious example of a nondiscretionary retailer.
What about the pandemic?
Since it's still only mid-2020, let's address the elephant in the room. How did the COVID-19 pandemic affect Realty Income's business? And it's certainly fair to worry about this -- after all, many REITs that were thought to be bulletproof have been crushed by store closures and unpaid rent.
The short answer is that Realty Income hasn't been completely unscathed. While most of Realty Income's tenants -- like those discussed in the last section -- are considered essential businesses, about one-fourth of the portfolio is occupied by businesses that may have been forced to close as the pandemic worsened, such as fitness centers, theaters, restaurants, and daycare centers.
However, the company is doing far better than most other retail REITs. Through June 1, Realty Income reported collecting 84.2% of expected April rent and 82% of expected May rent. And the company says that it's in rent deferral discussions with the majority of tenants who haven't paid, meaning that it can reasonably expect to get most of its owed rent eventually. Even some of the strongest retail REIT peers are reporting rent collection rates in the 50% to 70% range for those months, so this just goes to show what a rock-solid business model Realty Income has.
One of my favorite all-around stocks in the market
I've referred to Realty Income before as perhaps the best all-around stock in the market, thanks to its combination of bulletproof income and steady growth. Aside from being the first REIT I ever bought, Realty Income is a staple in my portfolio, and one that I could see myself holding until retirement and beyond -- and I'm still in my 30s.