This makes certain high-yield Real Estate Investment Trusts highly attractive for income investors. We believe Realty Income (O) is a high-quality monthly dividend stock with a high yield of 5.6% and a secure monthly payout. The company is an appealing stock for income investors looking for a high yield, and a reliable monthly dividend.
· Business Overview
Realty Income is a Real Estate Investment Trust, also known as a REIT, which means it owns real estate Properties that are rented out to tenants. As a landlord, Realty Income collects rental revenue, while avoiding much of the operating expenses such as insurance and taxes, which the tenant pays. Realty Income’s property portfolio is focused on retail.
Realty Income has a diversified real estate portfolio of over 6,400 commercial properties under long-term leases. The properties are leased to over 300 commercial tenants, spanning 50 industry groups. Properties are located in 47 states as well as Puerto Rico, and the United Kingdom. Realty Income owns retail properties that are standalone properties. This means that the properties are used by a wide range of tenants, including government services, healthcare services, and entertainment.
The current occupancy rate exceeds 98%, and has never fallen below 96%. Convenience stores represent the largest individual industry group, at over 11% of Realty Income’s rental revenue. The top tenants include Walgreens, 7-Eleven, Dollar General, FedEx, and Dollar Tree.
The company’s strong property portfolio has led to steady growth for many years. In the 2019 fourth quarter, revenue $398 million increased 16% from the same quarter the previous year. Contributors to revenue growth included rental increases at existing properties, as well as rental increases from investments in new properties made in the past year.
Funds from operation, or FFO, were flat in the 2019 fourth quarter from the same quarter the previous year. While total FFO continued to rise due to rental increases, on a per-share basis the FFO figure was partially offset due to equity issuances over the past year. Still, Realty Income’s funds-from-operations increased by 9% year-over-year, as its funds-from-operations-per-share came in at $0.86 during the fourth quarter.
For the full year, adjusted FFO-per-share increased 4% to $3.32 per share. It is likely Realty Income will continue to generate growth in the years ahead, even with a highly challenging environment for 2020. While FFO will likely decline in 2020, over the long-term, we expect continued growth once the coronavirus crisis is over. Realty Income’s future growth will be fueled by its investments in new properties. For example, in 2019 Realty Income invested $3.7 billion in 789 properties and properties under development or expansion, including $797.8 million in 18 properties in the United Kingdom.
· Dividend Analysis
We currently hold Realty Income as our top-ranked monthly dividend stock. There are many reasons for this, including its top-tier property portfolio, but also due to its impressive dividend history. Realty Income has declared 597 consecutive monthly dividend payments, which goes back nearly 50 years. It has also increased its dividend 106 times since its initial public offering in 1994. With at least 25 consecutive years of annual dividend increases, Realty Income is a member of the Dividend Aristocrats.
Realty Income currently pays a monthly dividend of $0.233 per share, which equates to an annualized payout of $2.80 per share. With a recent share price of approximately $50 per share, Realty Income has a current dividend yield of 5.6%. This is a highly attractive yield for income investors, especially due to the low interest rate environment. Stocks do not widely offer high yields either, as the S&P 500 Index on average has a 2.1% dividend yield right now.
By comparison, Realty Income stock is very attractive for income investors such as retirees. Not only does Realty Income provide a much higher level of income than the average dividend stock in the S&P 500, it also pays its dividend each month. Most other publicly-traded stocks pay dividends quarterly, semi-annually or once per year. This means Realty Income shareholders receive 12 dividend payments per year, which could be more useful for investors who utilize dividend income to pay for monthly expenses.
In addition, the dividend appears secure. Consensus estimates call for FFO-per-share expectations of $3.42 for 2020. Based on current analyst estimates, Realty Income’s dividend payout of $2.80 per share represents an implied dividend payout ratio of approximately 82% for 2020. This is a relatively high dividend payout ratio, but it is not uncommon for REITs to distribute the vast majority of per-share FFO to shareholders.
The company also has a strong financial position which will help it navigate a potential recession in 2020. Realty Income has a long-term credit rating of A3 from Moody’s and A- from Standard & Poor’s. According to the company, it is one of only 8 REITs with at least two A3 or A- credit ratings. Having a strong balance sheet and property portfolio helped the company survive the previous recession of 2008-2009. Realty Income was one of only two REITs in the S&P 500 with positive earnings growth, dividend growth, and total shareholder return during the Great Recession.
While no two recessions are identical, Realty Income’s track record of successfully navigating the previous recession to hit the U.S. recession at least bodes well for the company’s performance if another recession occurs.
· Final Thoughts
The stock market decline to begin 2020 has presented multiple buying opportunities for investors with a long-term view. But investors should focus on quality, as many hard-hit sectors will continue to struggle in this environment. Investors should assess the underlying company fundamentals to ensure the stocks they are buying have sustainable dividends. We believe Realty Income is among the highest-quality REITs in the entire market, as it has a long history of navigating recessions and paying dividends.