Although most Americans may regularly set foot in one of its buildings, they likely know little of Realty Income (NYSE: O) or its investment case. The real estate investment trust (REIT) owns about 15,500 single-tenant properties on net leases, meaning the tenant covers the maintenance, tax, and insurance costs.
Moreover, the S&P 500 stock bills itself as the "monthly dividend company" since shareholders receive 12 payouts per year.
Despite that benefit, the stock is down 35% from its 2020 high. Higher interest rates seem to have weighed on the stock in the last two years.
Nonetheless, considering this potential for continuous growth, it is likely a stock that investors will not only want to buy but also hold forever. Here's why.
Realty Income's business
Realty Income has benefited because large corporations increasingly want to cash out of real estate holdings to invest in their businesses. Many of these tenants are America's best-known companies, including Dollar General, AMC Theaters, FedEx, and numerous others.
Realty Income benefits from a lease rate of over 99%. Hence, the fear of a retail apocalypse caused by e-commerce moving activity to industrial properties does not seem to affect the company.
Additionally, its growth comes from steady rental rate increases and acquiring or developing new properties. In the fourth quarter of 2023, it had approximately 400 properties under development.
It estimates its total addressable market at $5.4 trillion for the U.S. and $8.5 trillion worldwide. Considering its stockholders' equity of $33 billion, it has barely scratched the surface of that market over a history that began in 1969.
Realty Income's stock performance
As previously mentioned, the company's stock is down 35% from the 2020 high. Interest rate sensitivity is high due to its growing real estate portfolio, and rising rates can weigh on profitability.
Indeed, growth has been sluggish recently. In 2023, revenue of $4.1 billion rose 4% yearly. Also, because of borrowing and depreciation costs, its net income of $873 million grew by less than 1%.
Still, its funds from operations (FFO), a measure of a REIT's free cash flow, was $2.8 billion in 2023, a 14% rise.
That was more than enough to cover the $2.1 billion in cash distributions, likely making its monthly dividend sustainable. This payout, which amounts to about $3.08 per share annually, has risen at least once per year since its inception in 1994.
Additionally, the lower stock price helped boost the dividend yield to 5.7%, more than quadruple the S&P 500 average of 1.4%. Such conditions make Realty Income a unique and potentially lucrative choice for income investors.
O Dividend Yield data by YCharts
Consider Realty Income
Although investors should never stop watching their holdings, Realty Income is arguably the closest thing to a "set it and forget it" stock.
Owning occupied, widely visited properties that are able to sustain rent hikes makes its growing dividend sustainable. It also allows the REIT to attract the capital needed to obtain and develop more profit-generating holdings.
Furthermore, the rising interest rates have actually benefited income investors, allowing them to buy at a time when they can earn a higher dividend yield. If looking for dividend-paying stocks, Realty Income provides a unique, cash-generating opportunity few S&P 500 stocks will match.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx and Realty Income. The Motley Fool has a disclosure policy.
