Realty Income Corp’s Dividend Keeps Powering Higher
May 21, 2019
Realty Income Corp Hikes Dividend Another 3%
One of the advantages of dividend investing is that it’s predictable.
Technology investors have a tough time projecting which companies will even exist in a few years. Income investors, in contrast, can often make accurate forecasts a decade or so into the future.
Take Realty Income Corp (NYSE:O). In an Income Investors column earlier this year, I predicted the real estate investment trust—which owns hundreds of retail properties across the country—would boost its distribution in early 2019.
I can report that Realty Income did not disappoint. Only a few days after the post appeared, the company raised its monthly dividend to $0.226 per share. That payout represents a three-percent increase from where the distribution stood last year.
“We remain committed to our company’s mission of paying dependable monthly dividends to our shareholders that increase over time,” said Realty Income Corporation President and Chief Executive Officer Sumit Roy. “With the payment of the April dividend, we will have made 585 consecutive monthly dividend payments throughout our 50-year operating history.” (Source: “101st Common Stock Monthly Dividend Increase Declared By Realty Income,” Realty Income Corp, March 12, 2019.)
I would love to claim that I have some special analysis powers, but truth be told, anybody could have seen this coming. Realty Income has raised its dividend every other month or so for more than two decades. With its rental income growing steadily, I had no reason to expect management to stop now. The only detail I couldn’t nail down exactly was how big the increase would be.
The Future of Realty Income Corp
A three-percent hike is nice, but it’s only when you start stringing these consecutive increases together that you really see the power of dividend growth in action. Since I added Realty Income Corp to the Retirement Riches portfolio in August 2015, the company has raised its dividend on 20 occasions. The monthly distribution is now 20% higher than it was just five years ago. What’s more, the shares have risen about 74% over that same period.
I think of the capital gains as a bonus. In Retirement Riches, my main goal is to build a conservative portfolio of dividend growth stocks that cranks out rising cash flow over time. Over the short run, we can see wild, random swings in market prices. That’s why I prefer to focus on dividends: they’re predictable. But as long as sales and earnings keep growing, I fully expect my stocks to grow in value over the long haul.
Now, Realty Income Corp’s dividend yield might not whet the appetite of some yield hogs. At 3.7%, this payout won’t exactly knock your socks off. But looking at the current yield in isolation misses the bigger picture.
To me, you have two ways of looking at dividend stocks. Some pay high dividends upfront, but then only grow their distributions slowly over time. Others pay lower yields at the beginning, but increase their payments at a much faster clip.
In the case of Realty Income, the landlord continues to find ways to return more cash to shareholders. Each year, executives raise rents on existing tenants. Over time, management pads its income further by purchasing new properties. More recently, executives have expanded outside of traditional retail real estate and into the fast-growing world of industrial buildings. With e-commerce sales exploding, demand for warehouses near major population centers has soared.
Moreover, investors should always pay up for quality. While Amazon.com, Inc. (NASDAQ:AMZN) turns retailers into road pizza, Realty Income’s business has held up quite well. Management has targeted property types that face little competition from online shopping—think grocers, dollar stores, and pharmacies. These tenants continue to generate robust sales and pay their rent on time.
Realty Income’s financial statements also look pristine. Last year, total rental income jumped 9.2% year-over-year to $1.3 billion. Adjusted fund flows from operations, a common measure of profitability in the real estate business, came in at $3.19 per share, compared to $3.06 per share in 2017.
The company dividend payout ratio stands at 85% of 2019’s estimated cash flow. Generally, I like to see businesses pay out 90% or less of their earnings as distributions. This leaves management with a little bit of wiggle room to keep making payments in the event of a downturn. So Realty Income’s dividend sits well within my comfort zone.
The Bottom Line on O Stock
Yes, you can find higher yields in other real estate investment trusts. Chasing bigger payouts, however, usually comes with a significant deterioration in quality. Most retail landlords face declining sales or struggle with overleveraged balance sheets. Their higher upfront payouts likely won’t grow much at all in the coming years or get cut entirely.
No stock is bulletproof, of course. If interest rates rise, Realty Income Corp shares will likely take a hit. A broader stock market panic could also send traders running for the exits. But given the business will likely throw off a growing income stream for many years ahead, I’m prepared to live with that risk.
