Realty Income(NYSE: O) is a dividend-paying machine. The real estate investment trust (REIT) recently declared its 108th consecutive quarterly dividend increase. That raise was its 127th since going public in 1994 and continued the REIT's 30-year streak of raising its dividend at least once a year. The company has grown its payout by a 4.3% compound annual rate during that time.
The company's latest dividend increase pushed its dividend yielda little bit further above the 5% mark. It undoubtedly won't be its last raise. Here's what makes the REITsuch a great way to collect passive income from real estate.
Built to pay durable dividends
Realty Income's mission is to deliver dependable monthly dividends to its investors that steadily increase over time, and it has certainly done that over the years. A major factor driving the dependability of its dividend is its durable real estate portfolio.
The REIT currently owns a diversified portfolio of around 15,450 properties across the U.S. and Europe. It focuses on owning real estate leased to retail, industrial, and gaming tenants in lines of business resistant to the impact of recessions and the threat of e-commerce.
It signs long-term net leases with creditworthy tenants. That lease structure makes the tenants responsible for a property's operating costs, including routine maintenance, building insurance, and real estate taxes. Those leases typically escalate rental rates at a low-single-digit annual rate. That provides the REIT with stable and growing income to support its steadily rising dividend.
Realty Income pays out a relatively conservative portion of its stable income in dividends (its payout ratio was less than 75% of its adjusted funds from operations (FFO) in the second quarter). That gives the REIT a decent-sized cushion while allowing it to retain a meaningful amount of its cash flow to fund new investments.
The company also has a fortress-like balance sheet. It's one of only eight REITs in the S&P 500 with two credit ratings of A3/A- or better. That gives Realty Income a tremendous amount of financial flexibility and allows it to borrow money at lower rates and better terms than companies with lower ratings.
A massive and growing market opportunity
Realty Income has grown its adjusted FFO at around a 5% annual rate throughout its history (slightly faster than the REIT sector average of 4.3% during that period). It believes it can grow around that same rate over the long term, targeting 4% to 5% annual adjusted FFO per-share growth.
Three factors drive that outlook. First, Realty Income expects about 1.5% annual same-store rent growth. Meanwhile, the company expects to deliver 2% to 3% yearly growth from internally funded accretive acquisitions (from post-dividend free cash flow). Subtract expected bad debt expense (roughly 0.4% annually) and the impact of higher interest rates as it refinances debt (a 1% to 2% annual drag), and Reality Income should deliver about 2% annual adjusted FFO per-share growth from internal sources.
On top of all that, the REIT can deliver an incremental 0.5% of adjusted FFO per-share growth for every $1 billion of externally funded acquisitions it makes (financed by selling stock and issuing new debt). It conservatively expects to make $4 billion-$6 billion of externally funded acquisitions each year, which would yield another 2% to 3% annual FFO per-share growth. Add it all up, and that's 4% to 5% of adjusted FFO per-share growth each year.
Realty income should have no shortage of new investment opportunities. The net lease market opportunity is vast. The REIT estimates it to be $5.4 trillion in the U.S. and $8.5 trillion in Europe. It has grown its overall market opportunity by expanding into new investment verticals, like data centers, gaming properties, additional European countries, and real estate credit. That's extending its already long growth runway.
A great way to collect a steadily rising income stream
Realty Income continues to build on its streak of consistent dividend growth. It should have no trouble continuing to increase its dividend each quarter in the future, thanks to its durable portfolio, strong financial profile, and ample growth drivers. Because of that, it's a great stock to buy if you want an attractive and steadily growing stream of passive dividend income.
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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
