I just can’t get enough of Realty Income (O 0.36%) this year. I have bought shares of the leading real estate investment trust (REIT) several times, including in the past week. The main reason is its high-yielding and steadily rising dividend.
Given the REIT‘s current value proposition, I’ll probably continue buying more shares any chance I get. Here’s why I keep adding to my position.
An excellent income stream
Realty Income is an amazing dividend stock. The REIT makes monthly dividend payments (it calls itself The Monthly Dividend Company), making it ideal for those who like to generate passive income. Meanwhile, the payout currently yields around 5.7%, which is several times higher than the S&P 500 index‘s yield (1.2%).
That well-above-average income stream is on an extremely sustainable foundation. Realty Income owns an increasingly diversified real estate portfolio backed by long-term net leases with many of the world’s best companies. Those leases require tenants to cover all operating costs, including routine maintenance, real estate taxes, and property insurance. Because of that, the REIT collects steady rental income.
The company pays out about 75% of its adjusted funds from operations (FFO) in dividends, which is a conservative level for a REIT. That enables it to retain a meaningful amount of cash to fund new investments. Realty Income also has an elite balance sheet. It’s one of only eight REITs in the S&P 500 with two credit ratings of A3/A- or better. These factors put the REIT’s dividend on a rock-solid foundation.
Very consistent growth
Realty Income recently declared its 128th dividend increase since its public market listing in 1994 (it has raised its payment for 109 quarters in a row and 30 straight years). It has grown its payout at a 4.2% compound annual rate during that three-decade period.
The REIT has been able to steadily increase its dividend because it has delivered remarkably resilient earnings growth. It has delivered positive adjusted FFO per share growth in 27 of its 28 years as a public company. Overall, it has grown its adjusted FFO at a 5% compound annual rate.
It’s in an excellent position to continue growing at a low- to mid-single-digit rate. Its existing portfolio should deliver around 1% annual adjusted FFO per share growth via contractual rental rate increases.
Meanwhile, it has ample financial capacity to continue making new investments to expand its portfolio. It makes billions of dollars of new property investments each year. It still has a massive growth runway ahead, given that there’s nearly $14 trillion of commercial real estate suitable for net leases across the U.S. and Europe. Realty Income has enhanced its ability to grow by adding new investment verticals, including expanding into gaming and data center properties, entering new European countries, and launching credit and private capital investment platforms.
A compelling value
Shares of Realty Income currently trade at a good value. They were recently about 15% below their 52-week high and around 30% under their pre-pandemic peak. With the REIT’s earnings rising, its valuation has declined.
It trades at about 15 times its enterprise value to EBITDA, which is below the REIT sector average of over 16x. That’s also well below the more than 24x valuation multiple of asset managers. The company should warrant a higher valuation as it grows its private capital management platform.
The total package
Realty Income checks all the boxes for me. It pays a high-yielding dividend backed by strong financial metrics. It’s also growing at a solid clip, which should continue. On top of that, it trades at an attractive valuation, which is getting harder to find these days as the market continues its ascent. These factors are why I continue adding to my position in the elite REIT and will likely keep doing so for as long as shares trade at a good value.
Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
