Could Buying Realty Income Stock Today Set You Up for Life?

Key Points

• Realty Income is the largest net lease REIT.

• It has a strong financial position and diversified business.

• The REIT has a long and impressive track record of reliably paying and growing its monthly-pay dividend.

• 10 stocks we like better than Realty Income ›

A strong business foundation is the cornerstone of a company's operations, but also of your portfolio. Investors looking to set themselves up with a lifetime of high-quality income will want to start with great businesses that also happen to have high yields.

That is exactly what Realty Income (NYSE: O) and its lofty 5.6% yield offer today. Here's what you need to know.

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Start with Realty Income's dividend

The S&P 500 index (SNPINDEX: ^GSPC) has a miserly dividend yield of 1.2% today. The average real estate investment trust's (REIT's) yield is 3.9%. Realty Income's average yield over the past decade was roughly 4.5%. The net lease REIT's yield today is around 5.6%.

Image source: Getty Images.

Let's break that down. Realty Income has a high yield on an absolute level. But the yield is also attractive relative to the broader market, REITs in general, and Realty Income's own yield history. If you are looking for a high-yield stock, now is a good time to be considering Realty Income for your portfolio.

But a high yield isn't going to set you up for life if it isn't reliable. So it's good news that Realty Income has increased its dividend annually for three decades. Within that streak, the dividend has been increased every quarter for 110 quarters (roughly 27 years). As if that wasn't enough, the dividend is paid monthly, so it is pretty close to a paycheck replacement. That should particularly interest investors who are entering retirement.

What about Realty Income's business?

If you're ready to buy Realty Income, don't. You still haven't heard about its business, which is the foundation that supports the dividend. As noted, it's a net lease REIT, which means that its tenants pay most of the costs associated with the single-tenant properties they occupy. Although any one property is high-risk, over a large portfolio, the risk is fairly low. Realty Income is the largest net lease REIT you can buy, with more than 15,600 properties.

The portfolio is highly concentrated in the retail sector (roughly 75% of rents), where properties tend to be very similar and, thus, are easy to buy, sell, and release as needed. The rest of the portfolio is split between industrial assets and unique investments in areas like agriculture, casinos, loans, and data centers.

On top of the property segment diversification, Realty Income also layers in geographic diversification. It invests in both North America and Europe, a region where the use of net leases is still fairly new. The company is also starting to offer management services to institutional investors.

Overall, Realty Income has a lot of levers to pull as it seeks to continue growing its business and dividend. But it also has a rock solid financial foundation, with an investment-grade rated balance sheet. Moreover, its industry-leading $50 billion market cap means that it can more easily tap the capital markets than smaller peers. Thus, it also tends to have advantaged access to capital, which allows it to compete aggressively for properties.

If there is one negative to consider with Realty Income, it's that the REIT's size limits its ability to grow. Basically, it takes a lot of investment to move the needle on the top and bottom lines. So slow and steady is likely to be the name of the game here, including when it comes to dividend growth. However, given the high yield, that's probably not the end of the world.

Realty Income is a foundational investment

Basically, if you add Realty Income to your portfolio, you have a reliable high-yield stock on which you can layer lower-yielding, but faster-growing, investments. Indeed, companies with rapid dividend growth rates often have modest yields. Realty Income paired with a dividend growth stock can leave you with a healthy income stream today (from Realty Income) and inflation protection (from the faster-growing dividend stocks). That can set you up for a very happy dividend-filled life.

Should you invest $1,000 in Realty Income right now?

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.