Do You Want to Maximize Your Returns? Buy This Low-Risk, High-Yield Dividend Stock.

Many investors tend to fall into one of two camps. They're either trying to maximize their income or their growth. A singularly focused strategy like that can sometimes miss the mark if your stocks stop generating income or growing.

A better strategy is to focus on maximizing your total return by investing in companies that pay a growing dividend. That combination of income and growth can really add up over the years.

Realty Income (NYSE: O) has done an excellent job of maximizing investors' returns over the years. The real estate investment trust (REIT) currently offers a high-yielding income stream and solid growth prospects at a value price. Because of that, it's in a strong position to help investors maximize their returns in the future.

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A bankable income stream

The hallmark of Realty Income is its monthly dividend. The REIT calls itself The Monthly Dividend Company. It has declared 660 consecutive monthly dividends since its formation and increased its dividend payment 131 times since its public market listing in 1994. The REIT has unbroken streaks of 111 straight quarters and 30 consecutive years of dividend increases and has grown its payout at a 4.2% compound annual rate during this period.

Realty Income's dividend currently yields 5.6%, and that high-yielding payout is on a rock-solid foundation. The REIT generates very stable income. It owns a diversified portfolio of high-quality real estate (retail, industrial, gaming, and other properties), net leased to many of the world's leading companies. Net leases produce very stable rental income because tenants cover all property operating costs, including routine maintenance, real estate taxes, and building insurance.

The REIT pays out a conservative percentage of its stable cash flow in dividends (75% of its adjusted funds from operations, or FFO). That allows it to retain excess free cash flow to fund new income-generating real estate investments. Realty Income also has one of the 10 best balance sheets in the REIT sector.

Remarkably resilient growth

Realty Income has been able to steadily increase its dividend because it has delivered remarkably consistent growth. Since its public market listing, the company has delivered positive adjusted FFO per share growth every year, except one (2009, during the financial crisis).

It has grown during periods of higher interest rates (5% compound annual FFO growth from 1996 to 2008) and low interest rates (5.4% compound annual growth from 2009 to 2022). It has also grown through multiple periods of economic stress (the Dot-com bust, the housing market crash, the pandemic, and the regional banking crisis).

Two factors have contributed to its durable growth: the REIT's high-quality net lease real estate portfolio and fortress-like financial profile. Its portfolio produces stable income to pay dividends, while its financial profile allows it to expand its portfolio in any market environment.

This combination of durable income and growth has added up over the long term. The REIT has paid an average dividend yield of 6% since its initial public offering in 1994. Meanwhile, it has historically delivered 5% average annual adjusted FFO per share growth. These factors have combined to provide investors with an average annual total operational return (dividend income plus adjusted FFO growth rate) of around 11%. On top of that, it has delivered valuation multiple expansion since its IPO, which has pushed its compound annual total return to 13.6% since its public market listing.

Compelling return potential from here

Realty Income continues to offer investors a very bankable, high-yielding dividend, which will provide them with a low-risk base return. Additionally, the company has tremendous long-term growth potential. The total addressable market for net lease real estate in the U.S. and Europe is $14 billion. That provides the REIT with a very long runway to continue growing its adjusted FFO per share at a mid-single-digit annual rate over the long term.

In addition to all that, Realty Income trades at a compelling valuation compared to other REITs. It currently sells for about 13 times its adjusted FFO, which is well below the 18x average of other REITs in the S&P 500. Realty Income trades at a discount to its REIT peers, despite consistently delivering a higher operational return compared to its peers (9.7% average over the past five years, compared to 7.7%).

When taken together, Realty Income's dividend yield, growth potential, and low valuation put the REIT in an excellent position to deliver attractive total returns in the future. Because of that, it's a great all-around stock to buy if you want to maximize your return potential.

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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.