Realty Income (NYSE:O) is a longstanding real estate investment trust that offers its shareholders monthly dividends produced by the company’s steady stream of rental income.
Shares are currently yielding 6.09%, far above the S&P 500 average and even most high-yield stocks so is now the time to buy Realty Income and hold it for the long run?
Realty Income Is a Dividend Goliath
If you are looking for an income play, the first checkbox to mark is a tenured history of dividend increases and Realty Income squarely fall into that category after increasing its payout since 1994. Last month marked the 130th payout increase.
Though it’s fair to say the dividend hasn’t exactly skyrocketed, Realty Income has managed to hold its dividend growth rate at about 4% on annualized basis over the past decade.
The other thing to look for in a dividend play is the ability to keep on rewarding loyal shareholders no matter the bumps in the road of markets or economies and again there Realty Income comes up trumps. Whether grow its dividend through the 2020-21 era, the 2008 financial crisis or the aftermath of the dot-com bubble, each time crisis hits O shareholders have been paid. It’s clear that the management team at Realty Income get an A+ grade in navigating downturns successfully.
Looking to the future, Wall Street analysts expect to see the O dividend keep growing at a rate of just below 3% per year over the next few years. Though slower than the trailing growth rate, shareholders can still take advantage of progressively higher incomes from shares bought today.
New Properties & Rental Income Hikes Bode Well
Luckily for shareholders, 2024 saw the company execute well with Realty Income’s adjusted funds from operations up by 4.8%. Revenue, meanwhile, climbed dramatically from $4.08 billion in 2023 to $5.27 billion for FY 2024.
Management kept investing in new real estate that will gradually increase the top line, as well as cash flows and dividends in the years to come. Last year, Realty Income invested about $3.9 billion, and its expected cash yield on this money was 7.4%. In total, the company acquired 349 new properties in 2024.
Rental increases gradually add to Realty Income’s total revenue too. In 2024, same-store rental revenue rose 0.5% from the previous year. Although this is a modest growth rate, it does showcase Realty Income’s ability to increase its revenues both through acquiring new properties and raising rents on its existing ones as they come up for new leases.
How Safe Is Realty Income?
Concerns have arisen around the security of commercial real estate since the turbulence earlier this decade with remote work surging. The spike in online shopping and switch-up in employment arrangements have both affected commercial properties, leading many investors to worry about investing in businesses like Realty Income that have significant exposure to them.
The good news, though, is that Realty Income’s portfolio has stared down those threats and come out on top. The trust’s largest tenants tend to be well-established companies for which physical retail is still the norm.
Among Realty Income’s top tenants are 7-Eleven, Dollar Tree, CVS, Walgreens, Home Depot and Walmart. With this list of leading retailers among its tenants, it seems unlikely that Realty Income has too much to worry about from the trends in commercial real estate.
Extremely high occupancy rates are another virtual put option under the share price. As of the end of last year, 98.7% of the real estate in the company’s portfolio was occupied. With an average remaining lease term of over 9 years, Realty Income is in a good spot to generate predictable rents while also expanding its portfolio.
What Are the Downsides of Realty Income?
The main drawback to owning O is the fact that the stock tends to trade off share appreciation for a high level of current income. Over the last year, for example, Realty Income has appreciated by just 6.9%.
While the broader market has been impacted severely by tariff fears this year, this is still below the return of the S&P 500 over the last 12 months.
Analysts also expect Realty Income to produce modest upside over the next 12 months. The average price target for the stock is $61.75, about 8% above the last close of $57.15. This return is respectable, but not exactly massive.
Generally speaking, buying Realty Income is better for producing dividend income than for generating returns through rising share prices.
Is Realty Income a Top Dividend Stock to Buy Today?
Between a high yield, a strong portfolio of commercial real estate assets and an excellent track record of dividend increases, there’s plenty to like about Realty Income right now.
This is especially true in light of the ongoing tariff negotiations uncertainty that investors are facing because Realty Income could be a reasonably good defensive stock due to its focus on real estate and its long-term leases with large, successful companies.
For dividend seekers on the lookout for gradual growth, Realty Income fits the bill. Sure, it’s unlikely to produce massive returns for shareholders but equally it is most likely going to produce reliable stream of monthly dividends for the foreseeable future. And with a yield of over 5%, there are relatively few dividend stocks that can offer investors a comparable combination of yield and relative security.
A final factor to note about Realty Income is that its historical performance improves dramatically when reinvested dividends are taken into account. Counting reinvested dividends, Realty Income has actually managed to moderately outperform the S&P 500.
So, for investors with long time horizons, the real power of O stock may come from buying, holding and reinvesting instead of using the dividends it produces for current income. While reinvesting dividends is usually helpful for long-term wealth creation, the effect is especially prominent in Realty Income’s case due to its high yield.
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.
