This Dirt Cheap Stock Has Raised Its Dividend for Over 25 Years in a Row. Here's Why It's Worth a Look Right Now.

This leading real estate investment trust has a stellar track record of growth and income. And it’s on sale right now.

Realty Income (O -0.75%) is one of the largest and most popular real estate investment trusts, or REITs, in the market. The company owns a portfolio of nearly 15,500 properties in the United States and Europe and has paid 647 consecutive monthly dividends to investors.

Built for steadily growing income over time, Realty Income has an outstanding track record of smart capital allocation and outsized returns. And right now is a rare opportunity to buy this proven winner on sale.

Realty Income’s business: The short version

Realty Income specializes in net-lease real estate, which essentially means most types of single-tenant commercial properties. About 80% of the company’s rental income comes from retail properties, but don’t let the term “retail” scare you: Realty Income has produced year after year of steadily growing income for two main reasons.

First, most of Realty Income’s tenants are recession-resistant, not vulnerable to e-commerce competition, or both. Specifically, most properties fit into one of four categories:

  • Non-discretionary retailers like drug stores that sell things that people need.
  • Discount-oriented retailers like warehouse clubs and dollar stores that offer bargains e-commerce retailers can’t match.
  • Service-based retailers like fitness clubs that sell a service or experience, as opposed to a physical product.
  • Non-retail businesses, including industrial, gaming, and agricultural properties, which collectively make up about 20% of the company’s rent.

Second, the net lease structure is designed for consistency and steady growth. Realty Income’s leases typically have an initial term of a decade or longer with annual rent increases built in. The net lease structure means that tenants are required to cover property taxes, building insurance, and most maintenance items.

In other words, the tenants cover the variable expenses of owning real estate. All Realty Income has to do is buy a property with a high-quality tenant in place, and collect year after year of predictable, growing income.

Realty Income has an excellent record of making smart capital allocation moves, and as one of the few REITs with A-rated credit from both Moody’s and Standard & Poor’s, it has a competitive advantage when it comes to raising debt capital.

A stellar track record

The proof is in the performance. Even though Realty Income is well off its highs right now, the stock still has generated a 13.6% annualized total return since its 1994 NYSE listing. To put this into perspective, consider that a $10,000 investment in Realty Income 30 years ago would be worth about $470,000 today, more than double what an S&P 500 index fund would have produced.

O Total Return Level data by YCharts

For income investors, not only does Realty Income have a dividend yield of just under 6% as of this writing, but it has raised its payout for a staggering 107 consecutive quarters. Assuming dividend reinvestment, someone who invested $10,000 in Realty Income’s 1994 IPO would be receiving $28,200 in annual dividend income today. Think about that for a second: Early investors in Realty Income are receiving nearly three times their original investment in annual dividend income today.

Why now?

The short answer is that Realty Income is a business that works in any economy, and right now shares are historically cheap. Despite the steady earnings growth, Realty Income trades for about 33% below its all-time high. Aside from a short blip in the early days of the COVID-19 crash, the last time Realty Income had a dividend yield this high was more than a decade ago.

With interest rates widely expected to start falling later this year, and to continue to normalize for the next few years, it could be a strong environment for REIT investors in the years ahead. And Realty Income has a proven track record of outperforming the S&P 500, especially during falling rate environments.

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