Realty Income (NYSE: O) was not only the first real estate investment trust (REIT) I ever bought for my own stock portfolio but also one I've added to considerably over the years. And I plan to hold it well into my retirement (I'll be 40 next year). Here's an overview of why I'm such a big fan of this retail-focused REIT and why I plan never to sell it.
Realty Income in a nutshell
Realty Income has been listed on the public market since 1994 but has been in business for more than 50 years. The company owns more than 6,700 properties, most of which are occupied by retail tenants, who make up 80% of the portfolio. The rest of Realty Income's portfolio comprises smaller concentrations of industrial, office, and agricultural properties.
It's also worth noting that Realty Income is set to merge with Vereit (NYSE: VER), which has a similar composition of retail and office properties. Once the merger is finalized, Realty Income plans to spin off its office properties into a separate, newly created REIT.
Wait, isn't retail risky?
Many investors are hesitant to get involved with any stock connected to physical retail, and it's easy to understand why. Retail bankruptcies and store closures were all over the headlines before the COVID-19 pandemic, and the disruption of the last 18 months or so certainly hasn't helped.
However, not all retail businesses are in the same boat. Specifically, Realty Income focuses on three types of retail that are largely recession-resistant and immune from the pressures e-commerce is putting on the retail sector. These are:
- Nondiscretionary retail: These are businesses that sell things people need. Walgreens (NASDAQ: WBA) and Walmart (NYSE: WMT) are two examples from Realty Income's top tenant list.
- Low-price retail: Businesses that sell things at a discounted nature tend to hold up very well during recessions and against e-commerce as they offer bargains online retailers can't match. I already mentioned Walmart, and Dollar General (NYSE: DG) and BJ's Wholesale (NYSE: BJ) are other good examples.
- Service-oriented retail: Businesses that sell a service, as opposed to a physical product, are naturally insulated from e-commerce. Fitness clubs like LA Fitness and FedEx (NYSE: FDX) are good examples among Realty Income's top tenants.
Many properties in the company's portfolio fit into more than one of these categories. In fact, Realty Income estimates that 96% of its rental income is insulated from recessions, e-commerce headwinds, or both. The company has some vulnerable retail tenants -- for example, a few movie theater properties are in the portfolio -- but for the most part, this is not the kind of retail you've read horror stories about.
Realty Income's tenants are in relatively safe (and essential) businesses, but the company also uses a net lease structure, which adds a layer of protection. (Note: Realty Income is often referred to as a "net lease" REIT.)
If you aren't familiar, a net lease is a type of leasing structure in which the tenant is responsible for most of the variable costs associated with the property. Realty Income's tenants pay for property taxes, building insurance, and most maintenance items. These leases typically have long initial terms (15 years or so) with annual rent increases, or escalators, built right in. All Realty Income has to do is get a tenant in place and enjoy decades of reliable, growing income.
The Millionacres bottom line
I have called Realty Income the "best overall dividend stock" in the market before -- and for good reason. The REIT not only has an attractive 4% dividend yield, a track record of frequent dividend increases dating back more than a quarter-century, and a history of more than 600 consecutive monthly distributions but also a proven record of growing in ways that add shareholder value.
In fact, since it was first listed on the NYSE in 1994, Realty Income has generated total returns (dividends plus stock price appreciation) of about 4,720%. This translates to an annualized return of more than 15%, meaning a $10,000 investment at the time of the company's listing would be worth more than $470,000 today.
Don't make the mistake of thinking Realty Income is finished growing yet. The company estimates that there is about $8 trillion worth of net lease properties in the U.S. and Europe, and roughly 2% of these are owned by publicly traded net lease REITs. With a market cap of less than $28 billion, Realty Income could still have tons of room to grow from here.
In a nutshell, I can't think of a better combination of income, growth, and predictability in the entire stock market, and that's why Realty Income has been and will continue to be a staple of my long-term investment portfolio.