1 Extraordinary Dividend Stock To Hold Forever

Since going public in 1994, the real estate investment trust, Realty Income, has generated a compound annual return of 14.6% for its lucky shareholders.

Of course, this yield isn’t just better than the S&P 500’s – it also beats the performance of the broader REIT sector during the same time frame too.

In fact, couple this with a yearly average dividend increase of 4.4%, and the stock looks extremely attractive to both income and growth investors alike.

But is there more to this popular property fund? And if so, does it deserve a place in your own investment lineup?

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What Makes Realty Income Different?

Realty Income Corporation is a real estate investment trust specializing in acquiring and managing single-unit freestanding commercial properties.

Indeed, the company typically employs a long-term, net lease agreement with its clients, ensuring the business enjoys a steady income stream while allowing it to maintain ownership of its many rental properties. Realty also provides various services to its clients, including property management, lease administration, tenant recruitment, financial analysis, and more.

On top of that, the Realty Income Corporation is one of the largest publicly traded real estate businesses in the United States, with a wide-ranging portfolio of properties spanning multiple sectors, including retail, healthcare, and office space.

Furthermore, the firm’s conservative approach to managing its properties has been a critical driver of its success. For instance, O’s strategy focuses on acquiring and owning high-quality properties with strong tenant relationships, mitigating risks associated with a diversified tenant base.

Additionally, the company’s disciplined approach to financing, with a conservative capital structure and a focus on maintaining a solid balance sheet, has enabled the company to continue delivering strong financial results over the years.

Realty’s Stellar Year

While some REITs are finding it challenging to operate profitably in the current financial climate, Realty Income has been breaking records of late.

Indeed, the company closed out an unprecedented $9 billion of property acquisitions in 2022. The firm also achieved a property-level occupancy rate of 99%, its “highest in over 20 years.

Interestingly, O is likewise making headway when it comes to developing new ways to expand the scope of its enterprise. The firm has partnered with Plenty Unlimited, an indoor vertical farm business, and has committed to investing up to $1 billion to capitalize on any opportunities.

Additionally, Realty Income’s adjusted funds from operations – or AFFO – rose 9.2% for the year, while normalized FFO for the three months ended December 31, 2022, spiked a massive 18.0% to $1.05 per share.

Will Inflation Hurt Realty Income?

With inflation and interest rates as high as they are, the broader economic outlook is challenging to predict.

However, the Federal Reserve has not been shy about tightening its monetary policy recently, and this could hurt Realty’s ability to continue in the fine form it’s been in lately. For example, higher borrowing costs could stifle its expansionist plans and potentially decrease demand for new and existing real estate.

That said, taking a more granular look at Realty Income’s property portfolio throws up an even greater danger that could imperil the company’s prospects in the future.

For instance, while its individual client mix is excellent – its biggest tenant, Dollar General, represents just 4.0% of its annualized contractual rent – the same can’t be said for its other efforts at diversification.

To begin with, it’s well-known that Realty specializes in the retail sector, and this expert knowledge helps it navigate the space in a superior manner to its competitors. Nevertheless, having 81.9% of its yearly income originate from the sector is a potent risk factor, whichever way you spin it.

But that’s not all. Over a quarter of Realty’s rent is derived from properties in just three jurisdictions – Texas, the UK, and California – while its industry diversification is similarly concentrated, with grocery stores, convenience stores, and dollar stores making up 26% of its total letting revenues.

Despite this, Realty’s top 20 clients are all companies that benefit from being insulated from changing consumer behavior in some way. This means they do business in the non-discretionary, non-retail, service retail, or low price point categories, giving them a significant degree of protection from the vagaries of a volatile market.

Is O Stock A Buy?

Realty Income offers a very enticing forward dividend yield of 4.66%, and it has also increased its quarterly distribution more than 100 times in a row now.

In fact, this consistency has elevated the business into the hallowed ranks of the so-called “Aristocrats” of the income-generating world, and for this reason, the company is popular with investors today.

And yet, the business is also reasonably priced when set aside its industry rivals, suggesting the enterprise could offer plenty of upside regarding share price appreciation too.

For instance, Kimco Realty Corporation – another real estate investment trust active in the retail sector – sports an AFFO-to-Total Revenue fraction of just 43% compared to O’s 78%.

The AFFO-to-Total Revenue ratio is a vital financial metric that enables real estate investors to gauge the extent to which a company derives its top-line revenue from its adjusted funds from operations. Moreover, this is important because a higher multiple can indicate a company’s ability to generate more revenue from its real estate assets, a major factor that could bolster its growth capacity over time.

Therefore, with its safe, generous dividend, exceptional valuation – and not to mention stable earnings – O would make a great addition to anyone’s income-focused portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.