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Realty Income Corporation: This Dividend Keeps Growing

Published Fri, 11 Jan 2019 12:52:32 on Income Investors

Dividend Stock Now Pays 4.2%
December 11 will go down as a forgettable day for investors. The Dow Jones, reeling from a two-week slide, shredded over 600 points by the middle of the trading session.
But one small group of stockholders had reason to celebrate. Commercial property landlord Realty Income Corp (NYSE: O) jumped 2.5% to a 52-week high of $69.91 per unit. Analysts credited the move to the real estate investment trust’s 99th consecutive distribution increase, which management announced before the start of the trading session. (Source: “99th Common Stock Monthly Dividend Increase Declared By Realty Income,” Realty Income Corporation, December 11, 2018.)
No wonder Realty Income has earned a special place in the hearts of readers. Since we discussed this trust in our inaugural August 2015 issue of Retirement Riches, management has boosted the monthly distribution to investors on 44 occasions. What’s more, units have delivered a total return, including distributions, of 51% over that period.
Of course, you can’t make money looking backward. And what units do over the next few months is anybody’s guess; O stock has had a great run recently and might be due for a correction. But Realty Income has a lot of things working for it, and over the long haul, I expect shareholders will be well rewarded.
Realty Income’s recent financial results have shot the lights out. Revenue during the third quarter jumped 10.2% year-over-year to $338.1 million. Adjusted fund flows from operations, a common measure of profitability in the real estate business, increased 10.6% to $236.2 million. (Source: “Realty Income Announces Operating Results For Third Quarter And First Nine Months Of 2018,” Realty Income Corporation Investor Relations, October 31, 2018.)
It also doesn’t hurt that rents are going up. Today, tenants now pay about one percent more on average compared to last year. Given the thousands of properties Realty Income owns, even a minor boost in rents translate into millions of dollars of extra income annually.
But acquisitions have emerged as the biggest growth driver. During the third quarter, the trust spent $608.5 million of new properties and development. That represents a big figure, even for this active acquirer. Combine that with sky-high occupancy rates (now over 98.8%), ongoing cost-cut initiatives, and disposing of underperforming holdings, and it’s no wonder that management boosted their profit guidance for the full year and beyond. (Source: Ibid.)
For shareholders, all of this should translate into a growing stream of income. Overall, management projects three- to five-percent growth annually in adjusted fund flows from operations over the next five years.
Given Realty Income’s modest payout ratio, O stockholders can expect to see their distributions grow roughly in line with cash flows. So, in essence, new investors are buying what amounts to a bond with a four-percent coupon that comes with annual payment hikes each year. That beats the pants off of most other fixed-income investments right now.
Of course, Realty Income comes with a bit more risk than your typical bond. Investors have good reason to worry about the future of brick-and-mortar retail. Online shopping has made road pizza out of traditional stores, clipping cash flows for retail property landlords. But Realty Income’s client base consists overwhelmingly of retailers inoculated against e-commerce—supermarkets, off-price clothing retailers, convenience stores, fitness centers, etc.
The partnership’s biggest tenants include rock-solid businesses like 7-Eleven, FedEx Corporation (NYSE: FDX), Circle-K, and Walgreens Boots Alliance Inc (Nasdaq: WBA). Judging by Realty Income’s persistently high occupancy rates and steady rent hikes, these types of businesses have held up to online rivals just fine. (Source: “Top 20 Tenants,” Realty Income Corporation, last accessed December 29, 2018.)
Bottom line: While investors may have little to cheer about nowadays, Realty Income continues to deliver good news for unitholders.
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Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
REALTY INCOME 72.70   54.2 1.34 2.72 3.75
WALGREENS BOOTS ALLIANCE 52.57   9.9 5.32 1.76 3.38
FEDEX 165.67   12.2 13.56 2.60 1.63


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