Real estate income (NYSE:O) has increased its dividend payout every year for thirty years in a row, which is an impressive streak. But Realty Income is a real estate investment trust (REIT), so most investors consider it nothing more than an income stock. It indeed offers high yield.
But if you change your framework even slightly, you’ll see that the stock can also be attractive to growth-oriented investors. Let’s dive in and see why.
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Real estate investment trusts operate under a specific corporate structure designed to pass their income through to their investors in a tax-advantaged manner. As long as REITs distribute at least 90% of their taxable income to shareholders each year through dividends, they avoid corporate taxes. Most REITs, including Realty Income, own physical properties that they rent to tenants.
Realty Income uses a net lease model that makes tenants responsible for the majority of the property-level costs of the properties they occupy, such as maintenance and taxes. The majority of the company’s assets are occupied by a single tenant, meaning there is a higher risk regarding the rental prices of each individual property.
However, with more than 15,400 properties across North America and Europe, Realty Income is the world’s largest net lease REIT, so the actual risk to its finances is quite low. Add to that the balance sheet with an investment-grade rating and concerns about the risks should disappear even further.
To be fair, though, most investors rightly view Realty Income as a conservative income investment. At the current share price, the dividend yields an attractive 5.5%, and payouts have been increased annually for thirty years. The dividend growth rate at that time? About 4.3% per year. That’s great if you’re trying to live off the dividend income your portfolio generates, but it doesn’t really sound like something growth-oriented investors of any kind would appreciate.
Wait a minute. What happens if you reinvest these dividends?
One of the most attractive features of Realty Income for a certain type of investor is its consistency. It is a slow and steady turtle. That’s boring, but boring can also be powerful when it comes to compound growth. With income stocks, much of that compound growth comes from reinvesting the dividends in more stocks. With REITs, that effect becomes even more powerful when done inside a Roth IRA, because no tax will be paid on the dividend (ever). The numbers speak for themselves.
