I recently bought a few more shares of Realty Income (NYSE: O). I've been steadily adding to my position in the real estate investment trust (REIT) over the past couple of years by taking advantage of market dips to purchase more shares. With the market slumping in recent months, shares of the diversified REIT have fallen about 10% from their 52-week high. That decline has driven its dividend yield up over 5.5%.
That high-yielding payout is one of the many reasons I haven't been able to stop myself from adding to my position any chance I get.
An amazing dividend
Realty Income's mission is "to deliver stockholders dependable monthly dividends that grow over time." The REIT has done an amazing job fulfilling that quest over the years. It recently declared its 658th consecutive monthly dividend since its founding in 1969. Meanwhile, it has raised its dividend 130 times since its public market listing in 1994. It has increased its dividend for 110 straight quarters and 30 consecutive years, and it has grown its dividend at a 4.3% compound annual rate over the past three decades. Its steady dividend growth has contributed to the REIT's strong total returns over the years, to the tune of 13.4% annualized since it went public.
Its investment strategy is a major factor driving its ability to deliver a steadily growing dividend. Realty Income invests in a diversified real estate portfolio net leased to many of the world's leading companies. Net leases provide stable rental income because tenants cover all of a property's operating expenses, including routine maintenance, real estate taxes, and building insurance. It typically signs long-term leases with annual rental escalation clauses. These features provide it with durable rental income that increases each year.
Realty Income further reduces risk by focusing on leasing properties to leading companies in durable industries. About 91% of its rent comes from tenants in sectors resilient to economic downturns and the pressures of e-commerce, such as grocery stores, convenience stores, and home improvement centers. It also seeks to partner with leading companies with strong brands and balance sheets. For example, some of its top tenants are 7-Eleven, FedEx, CVS Pharmacy, Home Depot, and Walmart. It also has diversified its portfolio by tenant, with its top tenant providing only 3.5% of its rent; by property type, including retail, industrial, gaming, and others; and by geography, encompassing the U.S. and Europe. All of these approaches help further reduce risk.
Built for steady growth
The main factor driving Realty Income's dividend growth is acquisitions. The REIT invests billions of dollars each year to build or buy additional income-generating net lease properties.
Realty Income couldn't do that without having a top-tier financial profile. It has a conservative dividend payout ratio for a REIT, at less than 75% of its adjusted funds from operations last year. That enables it to retain significant excess free cash flow each year to invest in additional income-generating properties. For example, it produced nearly $930 million in excess cash last year after paying dividends.
On top of that, Realty Income has an elite balance sheet. It's one of only eight REITs in the S&P 500 with two bond ratings of A3/A- or higher. That gives it greater access to lower-cost funding for acquisitions.
Realty Income typically buys properties in sale-leaseback transactions with new and existing clients. The company will often partner with a tenant in an initial real estate transaction and subsequently purchase additional properties from that client in the future. For example, during the fourth quarter, Realty Income closed a $770 million sale-leaseback transaction with 7-Eleven, making it the REIT's top tenant. That deal was the sixth one the companies have completed since beginning their partnership nearly a decade ago.
Most of its existing clients still own some of their real estate. Meanwhile, many other companies it doesn't yet partner with own their properties. That gives the REIT a very long runway to continue expanding its global real estate portfolio.
A foundational dividend stock
Realty Income has become a foundational holding for me. It supplies me with a very bankable stream of passive income that steadily rises. That growing dividend should enable it to continue producing attractive total returns. That's why I continue adding to my position any chance I get.
Should you invest $1,000 in Realty Income right now?
Before you buy stock in Realty Income, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $524,747!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $622,041!*
Now, it’s worth noting Stock Advisor’s total average return is 792% — a market-crushing outperformance compared to 153% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.
See the 10 stocks »
*Stock Advisor returns as of April 21, 2025
Matt DiLallo has positions in FedEx, Home Depot, and Realty Income. The Motley Fool has positions in and recommends FedEx, Home Depot, Realty Income, and Walmart. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
