I want to become financially independent. For me, that means generating enough passive income to cover my recurring expenses. Investing in dividend stocks is a big part of my strategy. I focus on companies that pay above-average dividends that should steadily rise in the future.
Realty Income (O) fits my strategy perfectly. The real estate investment trust (REIT) has done a phenomenal job increasing its monthly dividend over the years. It recently delivered its 126th dividend increase since going public in 1994.
The REIT should have no trouble growing its payout (which currently yields well above average, at nearly 6%) in the future. That’s why I buy more shares every chance I get.
Built to deliver a dependable, growing dividend
Realty Income has one of the better dividend-paying track records in the REIT sector. It has increased its payout for 29 straight years (and an impressive 107 consecutive quarters). While its most recent increase was a modest 0.2% higher than last month’s level, the dividend has risen by 2.9% over the past year and grown at a 4.3% compound annual rate since its public market listing in 1994.
A big factor driving Realty Income’s ability to pay a dependable and growing dividend is its high-quality real estate portfolio. The REIT focuses on owning a diversified portfolio of properties net leased to high-quality tenants in durable industries. That lease structure requires that tenants cover building insurance, real estate taxes, and maintenance. They also typically feature an annual rental rate escalation clause. As a result, Realty Income’s existing real estate portfolio supplies it with very predictable rental income that rises by more than 1% per year.
The company pays less than 75% of its stable cash flow in dividends each year. That provides a nice cushion while enabling it to retain cash to help fund new income-generating investments. The REIT also has a very strong balance sheet, giving it additional financial flexibility.
Realty Income estimates that it can internally fund enough new investments to grow its cash flow per share by 2% to 3% annually. Add in rent growth and subtract the impacts from higher interest rates and uncollectable rent, and the REIT should be able to internally grow its cash flow per share by more than 2% annually. That provides a solid foundation for future dividend increases.
Ample additional growth potential
Realty Income can grow faster than 2% per year. It’s targeting to deliver 4% to 5% of adjusted funds from operations (FFO) per share growth each year. That aligns with its historical growth rate of around 5% annually.
The REIT can deliver this incremental growth by making accretive acquisitions funded with outside capital (issuing new shares and debt). The company estimates it can increase its adjusted FFO per share by 0.5% per year for every $1 billion of accretive acquisitions funded with external capital.
That suggests it needs to make $4 billion to $6 billion of acquisitions each year to deliver 4% to 5% annual FFO per share growth. That’s certainly achievable, given that the company has made at least $9 billion of acquisitions in each of the last few years (including closing its $9.3 billion acquisition of fellow REIT Spirit Realty earlier this year).
Realty Income should have no shortage of investment opportunities. It estimates that the addressable market for net lease real estate is $5.4 trillion in the U.S. and $8.5 trillion in Europe. Its total addressable market opportunity has increased as the company expanded into new property verticals.
For example, Realty Income has added gaming, data centers, new European countries, and credit investments to its portfolio over the past couple of years. Add in corporate mergers as it continues to consolidate the net lease REIT sector, and Realty income has a very long growth runway ahead.
Income and upside
Realty Income pays a high-yielding monthly dividend that should continue growing as it acquires additional income-producing real estate. Add its income stream (around 6% per year) to its growth rate (4% to 5% per year), and the REIT should be able to generate double-digit total annualized returns over the long term. That compelling combination of income and upside is why I continue to buy more shares whenever I can.
— Matt DiLallo
Where to Invest $99 [sponsor]Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.
Source: The Motley Fool