Real estate income (NYSE:O) is a boring company, one that conservative dividend investors should find very attractive. That’s because this ‘boring’ company happens to offer a hefty dividend yield of 5.6%. It is a great choice for good sleep.
To back up this statement, check out these three reasons to love this high-yield real estate investment trust (REIT).
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Realty Income is a net lease REIT, meaning its tenants are responsible for most of the operating expenses at the property level. But it owns single-tenant assets, so this essentially means there’s a fair amount of risk associated with each property. That risk is mitigated by the fact that Realty Income owns more than 15,400 properties. It is one of the largest REITs in the world.
It is also one of the most diversified REITs in the world. Although the US market is the largest in the portfolio, Realty Income invests in eight countries. It has expanded that list as it moves further into the European market.
Additionally, Realty Income also diversifies its portfolio across different property types, with the largest exposure to retail and a smaller exposure to industrial assets. It also has a fairly large ‘other’ category, which invests in property types such as casinos and vineyards. Diversification helps limit risk, but also gives the REIT additional leverage to drive growth.
Perhaps the biggest testament to Realty Income’s financial strength is its three-decade streak of annual dividend increases. You simply can’t achieve that kind of consistency without a strong foundation and a solid business model.
However, there’s more to look at here. For example, its adjusted payout ratio (FFO) is roughly 75%, meaning there’s plenty of room for hardship before a dividend cut would be on the table.
The dividend, meanwhile, sits on top of a balance sheet with an investment-grade rating. This is where company size comes into play again. Because it is financially strong and large, Realty Income generally has greater access to the capital markets than its peers. So it can quite easily raise the money it needs to support its operations and pay dividends – a competitive advantage that should not be overlooked.
The long history of annual dividend increases is already seen as a sign of a strong and successful company. But there are also others to take into account. For example, Realty Income’s occupancy rate is solidly above the occupancy rate of the average REIT in the S&P500 (SNPINDEX: ^GSPC). Even during the Great Recession, occupancy rates did not fall below 96%. This is a very strong portfolio.
But there’s another interesting statistic to consider: In Q3 2024, Realty Income recaptured 105% of expiring rents. Realty Income’s leases generally include regular rent increases, so this basically means that the properties are so desirable that tenants are willing to pay even more than they already were to stay, or that new tenants are willing to pay more than older ones to get in. one of the REIT’s properties. That’s a clear sign that management is doing a good job selecting assets.
That said, Realty Income won’t excite you. For example, the dividend growth rate here is likely to be in the low to mid-single digits, as it has been in the past. But when you add that to the financial strength, the diversification, the strong business history, and of course the high yield, you can see why conservative dividend investors should have Realty Income on their wish list, if not in their portfolio.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
3 Reasons to Buy Real Estate Income Stocks Like There’s No Tomorrow was originally published by The Motley Fool
