A few years ago, I read an eye-opening report on dividends that completely changed my investing mindset. While I’ve always loved investing in dividend stocks, I focused on buying those with the highest yields.
However, the Power of Dividends report by Hartford Funds made me shift my direction. It showed that while dividend-paying stocks outperformed non-payers (9.6% average annual return vs. 4.8%), dividend growth stocks significantly outpaced companies with no change in their dividend policy (10.7% total return compared to 7.1%). That data has led me to refocus on investing in companies with a track record of growing dividends (that seems likely to continue in the future).
One of the best is Realty Income (O). The real estate investment trust (REIT) has increased its dividend for 27 straight years, including in the last 101 consecutive quarters. With that streak likely to continue, I buy more shares whenever I get the chance.
A magnificent payout
The obvious draw is the company’s attractive and growing dividend. Realty Income currently pays a monthly dividend that yields 4.5%. That’s more than double the 1.6% dividend yield of the S&P 500, and it certainly satisfies my desire for yield. More importantly, it has increased the payout 118 times since its public market listing in 1994.
That above-average dividend is on a very secure foundation. Realty Income owns a diversified portfolio of operationally critical real estate net leased to high-quality tenants. That lease structure requires the tenant to cover building insurance, maintenance, and real estate taxes, enabling Realty Income to generate very stable rental income. Most leases feature embedded rent growth clauses.
Meanwhile, the company pays out a conservative portion (for a REIT) of its steady income via the dividend (its adjusted FFO payout ratio was 76% in the third quarter). That gives it a nice cushion and allows it to retain some cash to help fund acquisitions. Realty Income further fortifies its financial foundation by having one of the highest credit ratings in the REIT sector, giving it more flexibility to fund deals.
Lots of room to continue growing
While rising rents at Realty Income’s existing properties help grow its income, the company’s primary growth driver is acquisitions. The REIT purchases properties in sale-leaseback transactions and portfolio acquisitions. It showcased both strategies late last year.
In early December, Realty Income closed its purchase of the land and real estate assets of the Encore Boston Harbor Resort and Casino from Wynn Resorts (WYNN). The $1.7 billion sale-leaseback transaction was its first acquisition in the gaming industry as it continues to diversify its portfolio. The Wynn lease featured a 30-year term with rent growth of 1.75% annually for the first 10 years. Overall, the company expected to purchase over $6 billion of properties last year.
Meanwhile, at the end of last year, the company agreed to acquire up to 185 single-tenant retail and industrial properties from CIM Real Estate Finance Trust. It’s paying $894 million in cash for a portfolio of high-quality properties with an average remaining lease term of 9.2 years. That deal is the fourth between Realty Income and CIM since 2019. In addition to property portfolios, the company has also acquired other publicly traded REITs to grow its portfolio and dividend.
Realty Income sees lots more growth ahead. The company estimates the owner-occupied single-tenant property market across North America and Europe to be $12 trillion. That gives it lots of running room to continue acquiring properties. It’s working toward its goal of growing from a top-ten global REIT to one of the five largest in the world by continuing to consolidate the sector. Realty Income believes that this growth will enable it to continue increasing its dividend and delivering attractive total returns to investors (its target is to produce an average annual total shareholder return in the double-digits).
A magnificent track record of growing value
Realty Income’s dividend growth strategy has paid off for investors over the years as it has delivered market-beating total returns of 14.4% annualized since its public market listing. With more dividend growth ahead, the company should be able to continue producing attractive returns for shareholders. That’s why I plan to continue buying shares in the future.
— Matthew DiLallo
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Source: The Motley Fool