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

Key Points

• Realty Income has increased its dividend annually for three decades.

• The company has been working to position its business for growth, offering scale that no other competitor can match.

• Realty Income serves both the needs of customers and the needs of multiple types of investors.

• 10 stocks we like better than Realty Income ›

Realty Income's (NYSE: O) dividend yield is about 5.3% today. That compares very favorably to the S&P 500's (SNPINDEX: ^GSPC) scant 1.2% yield and the average real estate investment trust's (REIT's) yield of roughly 3.8%.

That well-above-average yield is backed by a dividend streak 30 years long. But the real star of the show is Realty Income's business.

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Here are three reasons why this giant net lease REIT could set you up for a lifetime of income.

Image source: Getty Images.

1. Realty Income has already created a scale advantage

Real estate investment trusts follow a pretty simple model: Buy property, and then lease that property out to tenants. That said, the REIT structure requires REITs to pay out at least 90% of taxable earnings as dividends. So REITs are always in need of capital to fund their growth, which requires tapping capital markets by selling debt and equity. Being a large business helps companies when they go to investors looking for new capital.

Realty Income has a market cap of roughly $55 billion. Its next-closest peer has a market cap of about $15 billion. Realty Income owns more than 15,600 properties, far more than any of its peers.

Although it is focused on retail assets, which make up around 75% of its rents, it is still large enough to make material deals in other property segments, too. However, the key story here is that Wall Street knows and trusts industry giant Realty Income and is willing to provide it easy access to the capital it needs to keep growing.

2. Realty Income has a solid foundation

The diversification story around Realty Income is important. While retail is the main property focus, that asset class tends to be easy to buy, sell, and re-tenant as needed. It is one of the largest, most liquid asset classes. It makes sense to focus there. In addition to that, the REIT has broadened its geographic reach to include both North America and Europe, adding another layer of diversification.

The portfolio beyond retail offers additional diversification and areas for growth, notably including recent investment niches like casinos and data centers. Essentially, Realty Income has a solid foundation for its business from an operations perspective.

In addition to that, Realty Income also has an investment-grade-rated balance sheet. This fact, combined with the REIT's size, means that Realty Income can usually get advantaged rates when it seeks new capital.

Essentially, the risk/reward profile for investing in an industry-leading, diversified, and financially strong REIT is a highly attractive one on Wall Street. And that provides a competitive edge to Realty Income as it looks to compete for assets. Note that its size also means it sees most, if not all, of the major deals that hit the market.

3. Realty Income is in the sweet spot

So Realty Income has created a strong business with scale. That is enticing to income lovers for the consistency it's created on the dividend front.

But there's another little twist here, since the REIT's dividend is paid monthly. That makes an investment here similar to a paycheck for retirees. Small investors will appreciate that fact.

However, Realty Income is also providing valuable capital to property owners. Via sale/leaseback transactions, the company creates capital for the seller that can be used to grow. The net lease structure that's used allows the seller to keep effective control of that asset. So even Realty Income's customers are getting a valuable benefit here and are very happy to do business with what is often a preferred partner.

And Realty Income is also creating a new business serving the needs of institutional investors, like pension funds. This is interesting because the REIT generates fees from this effort that will help support the dividend for individual investors.

But it also means that Realty Income is helping more than just individual investors meet their income needs. And serving this customer group well, in the end, gives Realty Income yet another lever to support its long-term growth.

There's one small problem with Realty Income

There is a lot to like about Realty Income, but it has a flaw. Given the company's size, it needs to make a lot of transactions to grow the top and bottom lines. As such, growth tends to be slow, noting that the dividend has grown at a compound annual rate of roughly 4.2% over the past 30 years.

However, that is still enough to exceed the historical growth rate of inflation, meaning the buying power of the dividend has increased over time. If slow and steady is your speed, Realty Income could easily set you up for a lifetime of reliable income.

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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.