Realty – Earlybirds Invest

Realty Income (O 1.27%) is offering investors a 5.6% dividend yield today. That’s well above both the market’s 1.2% yield and the average real estate investment trust’s (REIT’s) yield of roughly 3.9%.

If you’re a long-term dividend investor, it probably makes sense to consider adding Realty Income to your portfolio, since it has increased its dividend annually for three decades and counting. But make sure you understand these three things before you buy it.

1. Realty Income is a giant

With a market capitalization of roughly $50 billion, Realty Income is multiple times larger than its next closest peers in the net lease niche of the REIT sector. This is both good and bad.

Three people in a row in various stages of making a muscle with their arms.

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On the negative side, Realty Income is so large that it takes a huge amount of new property acquisitions to move the needle on the top and bottom lines. This means that relatively slow growth is likely to be the norm here in the future. But being so large isn’t all bad.

On the positive side, Realty Income has the wherewithal to take on deals that its peers couldn’t manage. It likely sees all of the material deals that are in the market (allowing it to cherry-pick to some degree), it can act as an industry consolidator, and its size gives it easier access to Wall Street. So while slow growth is probably going to be the norm, steady growth is also highly likely, with contractual rent bumps in its leases augmented by its ability to keep buying new properties.

2. Realty Income is looking to increase its growth opportunities

Realty Income isn’t ignoring the size limitations it faces. In fact, it is embracing its scale. For example, a few years ago it began expanding into Europe, a market that is still only just starting to use the net lease approach. That materially expands the opportunity set the company has as it looks to buy new properties.

Realty Income has also been working to increase the number of property markets in which it competes. Historically, retail and industrial has been the core here. But management has been venturing into new spaces, like casinos and data centers, as it looks to find new levers for growth.

More recently, Realty Income has started to make loans and to offer asset management services to institutional investors. Overall, this giant REIT is using its scale to reach out into new areas that will, hopefully, help to sustain its growth over the long term.

3. Realty Income knows what it is

The last issue that really matters here is that Realty Income isn’t trying to be something it’s not. Management understands that it is a giant company and that investors buy it because of its large and reliable dividend. In fact, the company trademarked the nickname, “The Monthly Dividend Company” to highlight the commitment it has to being a reliable dividend stock.

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This is so important because it means that the board and the CEO aren’t building castles in the sand that will get washed away when the tide comes in. They are building a REIT that can keep paying dividends reliably through thick and thin. That means that long-term investors can use Realty Income as a foundational investment atop which they can comfortably buy more aggressive dividend stocks.

What really matters with Realty Income is both obvious and subtle

Every company has nuances to consider, and that’s true of Realty Income, too. The two most obvious stories are the company’s vast size and what it is doing with the scale it has achieved. In the background, however, is perhaps the most notable issue. Realty Income knows what its shareholders expect, and it’s working every day to meet those expectations by providing investors with a reliable and growing dividend.

Times have changed, but history is important

Back at the turn of the century, REITs were still a somewhat obscure asset class. In fact, they remained a niche segment of the financial sector until 2014, when real estate finally got its own sector designation. Ultimately, way back in 2000, REITs weren’t well followed and were largely the purview of small, income-oriented investors. A material portion of the growth over the past 25 or so years has come from the inclusion of REITs in the portfolios of larger investors.

A piggy bank with stacks of money and a hand putting water on them showing growth.

Image source: Getty Images.

But the performance numbers are still interesting to consider. The growth of $10K noted above for Realty Income compares to the same investment increasing to roughly $43,000 for the S&P 500 index. That, however, is a price-only figure. That same amount with dividend reinvestment would have grown to nearly $68,000 in the S&P 500 and, hold your hat, over $230,000 for Realty Income.

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How is that possible? The answer is that back in the 2000s, Realty Income’s yield was quite high. Compounding the dividend via dividend reinvestment supercharged the stock’s total returns. The S&P 500’s yield wasn’t nearly as high. So, Realty Income benefited from both the increase in price that came with the broader acceptance of the REIT asset class and its lofty, and steadily growing, dividend.

What’s the future going to look like?

Obviously, the future is unknowable. However, given the past, Realty Income is likely to be a reliable dividend stock. It has increased its dividend annually for 30 consecutive years. If it keeps that up, even though growth is generally fairly modest in any given year, it will be a solid foundation for a broader income portfolio.

But there’s another bit to consider here. While Realty Income’s dividend yield isn’t as high as it was back when REITs were less popular, it is still pretty high at roughly 5.6%. For comparison, the S&P 500’s yield is only about 1.2%. Compounding that dividend will still help to supercharge Realty Income’s return.

But that’s not the only thing worth noting. Realty Income’s stock price is down around 30% from the highs it reached prior to the coronavirus pandemic. That suggests that there is some recovery potential here to go along with the lofty dividend. Put the two together, and investors could see pretty attractive and reliable long-term returns over time.

Realty Income is a foundational investment

That said, Realty Income isn’t going to excite you. But that’s the point of buying this REIT. It is a boring and slow-growth business that will provide you with a lofty yield. You can pair it with lower-yielding but higher-growth investments to create a portfolio that will help turn you into a millionaire. That’s the value of a $10,000 or $100,000 investment in Realty Income. It can give you the emotional and financial strength to take on the kind of investment risks that will drive the value of your portfolio into seven figures. And yet, as history shows, this REIT, which has outperformed the S&P 500, is anything but dead money.