Realty Income’s (NYSE: O) legendary monthly dividend appears to be the safest it has been in over a decade, despite the underlying challenges retail REITs are facing these days. The company is often praised by income-oriented investors due to featuring one of the most impressive dividend-growth track records among REITs, including 25 years of consecutive annual dividend increases.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
With Realty Income’s payout ratio becoming healthier by the year and dividend hikes coming in like clockwork, the 4.6%-yielding stock presents an attractive investment opportunity for long-term investors. Accordingly, I am bullish on the stock.
Interestingly, Realty Income stock has a 9 out of 10 Smart Score rating on TipRanks, making it likely to outperform the market, going forward.
What Lies Behind Realty Income’s Consistent Success?
Realty Income’s prolonged dividend-growth track record is a testament to the company’s persistent success. However, what is the secret sauce behind Realty Income’s consistent outperformance against its industry peers? Well, it’s none other than management’s unparalleled expertise and thoughtful capital allocation strategy. Realty Income’s management has successfully helmed the company through numerous economic climates, consistently coming out stronger from times of unfavorable market conditions. These include the Great Financial Crisis, which had decimated most REITs at the time.
Overall, Realty Income’s management has historically uncovered compelling investment opportunities in retail properties, resulting in above-average market returns. Over the years, the company has constructed a high-quality, diversified retail asset base comprising over 11,700 properties that are leased to over 1,100 individual clients operating in 79 separate industries across all 50 states, as well as Puerto Rico, the United Kingdom, and Spain.
The company’s reputation and, again, its management’s mastery have also allowed Realty Income to sign very favorable leases that enable it to grow in a predictable manner. Specifically, Realty Income’s weighted average remaining lease term currently stands at approximately 8.8 years. With such high cash-flow visibility ahead, Realty Income can comfortably grow and acquire new assets, as there is limited uncertainty regarding its future earnings.
Furthermore, due to such prolonged leases, the company won’t suddenly find itself with vacant properties for which it can’t find tenants if market headwinds were to abruptly occur. That’s why occupancy stood at an industry-leading 98.9% during Q3. Not even the highest-quality retail REITs feature occupancy rates that are even remotely close to this number these days, which demonstrates Realty Income’s edge in the space.
Growing Dividend, Declining Payout Ratio
Last week, “The Monthly Dividend Company,” as Realty Income had proudly trademarked itself, once again reminded investors of its superiority in the retail real estate space, growing its dividend once again.
The dividend hike was by 0.2% compared to the previous payout level. While this sounds like a soft increase, it’s just one of the multiple intra-year dividend hikes. This year, Realty Income announced four dividend hikes, boosting its trailing-12-months dividend rate to $2.969 per share, a year-over-year increase of 7.1%.
It’s worth noting that Realty Income’s 10-year dividend-per-share CAGR stands at around 5.3%. Thus, the company’s dividend growth pace actually accelerated this year, which is incredibly impressive, given the rising interest rates and the overall shaky macro environment. Why? Well, besides Realty Income’s management wanting to flex its muscle during the thunderstorm, likely, it’s because Realty Income’s payout ratio has been on the decline for years, allowing for more assertive dividend hikes.
Specifically, funds from operations (FFO, a cash-flow metric used by REITs) per share has grown by around 6% annually over the past decade, a higher pace than dividend-per-share growth during the same period, resulting in a declining payout ratio. For context, in 2012, the payout ratio stood at 85.6%. In 2017, it stood at 82.9%. Now, based on 2022’s consensus FFO estimates of $4.01, the company’s forward payout ratio currently stands at 74.5%. Thus, it’s not unlikely for O stock to sustain above-average dividend hikes for a while, as the company can easily afford it.
Is Realty Income Stock a Buy, According to Analysts?
Turning to Wall Street, Realty Income has a Moderate Buy consensus rating based on six Buys and four Holds assigned in the past three months. At $68.50 the average Realty Income stock forecast implies 6.6% upside potential.
Takeaway – Realty Income is a Dividend Compounder
Realty Income has proven itself to be one of the best total-return compounders among REITs, with its 25-year track record of annual dividend hikes radiating the company’s operating excellence.
The stock should keep serving income-oriented investors quite well, as Realty Income’s robust cash flows and below-average payout ratio should enable management to sustain above-average dividend increases. Investors also benefit from the fact that dividends are paid out monthly, as future returns can compound faster if dividends are reinvested at a monthly rate, even if that’s by a small margin compared to quarterly payouts.
Regardless, with Realty Income’s yield now standing at 4.6% and its overall prospects remaining rock solid, I believe the stock’s investment case is quite enticing, tied to a great margin of safety as well.
