Many, many years ago, I bought Realty Income (NYSE: O) when it was yielding 10%. It was an incredible buy, perhaps the buy of a lifetime. Only when the yield dropped to 4% I sold it, thinking it was overvalued. I made a tidy profit, but I also lost out on the dividend growth and price appreciation since that point.
Now, as the VEREIT acquisition is about to get consummated, I'll end up with Realty Income in my portfolio again (I own VEREIT). Here's why Realty Income is quickly going to be one of my favorite dividend real estate investment trusts (REITs) and why I won't likely make the mistake of selling it again.
1. An impressive record
Realty Income has increased its dividend for 28 consecutive years. That makes it a Dividend Aristocrat, a highly exclusive group of companies. You simply don't get onto this list by accident -- the past 28 years have included the tech bubble, the 2007 to 2009 housing-led recession, and the 2020 coronavirus pandemic. Throughout each of these massive market upheavals, Realty Income continued to increase its dividend without fail. And within that streak, there's another one: Realty Income has increased its dividend every quarter for 112 quarters.
To be fair, the dividend growth here isn't fast. The average increase over the past decade has been in the low-to-mid single digits. That's enough to keep up with, and perhaps slightly exceed, inflation, so it shouldn't be scoffed at, but it certainly won't get you excited.
But excitement isn't the goal; it's slow, steady, and reliable dividend growth. And on that front, Realty Income is a clear standout.
2. More frequent, more better
Sticking with the dividend for a second, there's another important nuance about Realty Income. Most REITs pay their dividends quarterly, which can make scheduling difficult if you're a dividend investor looking to live off of the income your portfolio generates. Realty Income pays its dividend monthly, significantly easing budgeting requirements. It's almost like getting a regular paycheck. And, going back to point one, this paycheck gets a cost-of-living bump every year.
3. Solid as a rock
Underpinning the dividend here is a conservative business model. For starters, Realty Income owns single-tenant properties for which its lessees are responsible for most of the operating costs of the assets they occupy. This is what's known as a net lease, and it is generally considered a safe way to invest in the real estate space, leaving Realty Income to, simplifying things greatly, just sit back and collect rents. Realty Income makes the difference between its financing costs and its rental rates (more on this in a second).
Management has also taken a conservative approach with the balance sheet, earning the REIT an investment-grade credit rating. In fact, Realty Income says it is one of only eight REITs with an "A" rating from two major credit rating agencies. If you're looking for a safe dividend payer, Realty Income is a great pick.
Roughly 85% of Realty Income's portfolio is dedicated to retail assets, making it largely a retail REIT. However, it owns around 6,500 properties, so no one asset is all that important to the overall business. And it has recently been expanding into Europe, which accounts for around 9% of rents. That should continue to increase over time, providing a new avenue for growth and important geographic diversification.
The rest of the portfolio is in industrial assets that provide at least a little bit of an offset to the company's sizable retail footprint. While not as diverse as a REIT like, say, W.P. Carey, a REIT I happily own, Realty Income does actually do a good job of spreading its bets around.
5. About to get even better
I noted above that I own VEREIT, which is about to be bought by Realty Income. Not only will this transaction make me a Realty Income shareholder again, a big win in my book, but it will also increase Realty Income's portfolio to over 10,000 properties. That further augments Realty Income's diversification and gives it even more clout in the net lease industry, allowing it to take on deals that few, if any, of its peers could swallow.
The deal is expected to be 10% accretive from the get-go and provide lingering benefits as Realty Income refinances VEREIT's higher-cost debt at lower rates. The merger also will allow the combined company to spin off a net lease office portfolio, removing a property niche that Realty Income finds less compelling. This is a win/win all around.
6. That modest yield
The big drawback here is that investors are well aware of how well-run Realty Income is, and the yield is toward the low end of its historical range, at around 4.2%. This was exactly why I sold the stock several years ago.
But what I didn't really think enough about at the time is that Realty Income pays most of its cash out in the form of dividends. That means that it has to tap the capital markets for growth capital. Having an investment-grade-rated balance sheet means debt is relatively cheap. But the cost of equity is roughly the dividend yield. So, that low yield is actually a growth benefit, since it allows Realty Income to sell stock at attractive levels, too.
All in, having a low cost of capital is a huge competitive advantage for the REIT and one that I'm not going to overlook this time around.
Looking forward to the big day
Realty Income is easily one of my favorite dividend stocks. At this point, I'm eagerly awaiting the close of Realty Income's VEREIT acquisition so I get a second chance to own it. It's a great company that, frankly, I probably wouldn't have bought because of the relatively modest yield.
And now that I'm a bit older and less focused on getting big yields over owning great companies, I'm not likely to sell Realty Income for a quick capital gain this time around. Instead I'll just sit back and collect my monthly dividends (reinvesting them for now) as I let the company slowly grow and diversify its business over time. Slow and steady often ends up winning the race, and I'm eager to add this tortoise to my portfolio again.