Decades of Dividend Hikes and a Historically High 5% Yield Make This Stock a Buy

Conservative income investors looking for a reliable dividend-paying stock have an opportunity to own Realty Income (NYSE: O) today with an attractive yield. That doesn't happen too often. And the historically high yield has more to do with the general market than with anything specific that's happening at this real estate investment trust (REIT).

Here's a quick look at why now is a good time to buy a business that has trademarked the nickname "The Monthly Dividend Company."

Why buy Realty Income now?

The proximal reason for buying Realty Income today is that its dividend yield is roughly 4.9%. That's well above what you'd get from an S&P 500 Index ETF (roughly 1.6%) or the average REIT (3.75%), using Vanguard Real Estate Index ETF as a proxy. However, the really big attraction is Realty Income's dividend yield relative to its own history.

A hand planting money in the ground to show long term investing growth.

Image source: Getty Images.

Although the price-to-earnings ratio may be a more traditional valuation metric, dividends are far more consistent than earnings. And investors tend to keep stocks within a yield range over time. Thus, dividend yield can provide a rough gauge of valuation. In this situation, Realty Income's dividend yield is currently on the high side of its 10-year range.

To be fair, a yield above 5% would be better. And 6% or higher, which it has hit a couple of times over the last decade, would be pretty awesome. So dyed-in-the-wool value investors might want to hold off. However, if you are willing to take a good price for a great dividend stock to lock in a reliable dividend stream, you might want to jump on this while you can to ensure you don't miss out on the opportunity.

O Dividend Yield Chart

O Dividend Yield data by YCharts

Realty Income has a great dividend history

The thing with Realty Income is that it has proven itself over time. That starts, again, with the dividend, which has increased annually for 28 consecutive years. You don't build a streak like that by accident. The REIT is doing something right and, at the same time, clearly believes that it should reward investors with a growing income stream. Meanwhile, think about the last 28 years. They included the 2000 tech bubble, the Great Recession, and a global pandemic. Realty Income's dividend kept growing through all of these major market and economic disruptions.

That said, this isn't a stock that's going to wow you with growth. The dividend has increased at a compound annual rate of 4.4% over that nearly three-decade span. That's more than enough to maintain, and perhaps slightly increase, your buying power in the face of historical inflation rates. But it isn't something you'll likely brag about at a cocktail party.

There's nothing to suggest this trend is going to change, either. Notably, the REIT has an investment-grade-rated balance sheet. So financial strength isn't at issue. It is the largest net lease REIT, with a portfolio of more than 12,200 properties. This is a scale that none of its peers can match.

Roughly 75% of those buildings are fairly generic retail structures that are easy to buy, sell, and re-tenant. The rest of the portfolio provides some diversification with industrial assets and a couple of unique properties (vineyards and a casino) thrown in for good measure. And around 11% of rents come from Europe, providing geographic diversification and a further avenue for long-term growth in a region that is currently underpenetrated by net leases.

Net leases are also an important part of the story. Realty Income's single-tenant properties require that the lessee pay for most of the operating costs of the asset they occupy. That means that Realty Income avoids the rising costs that come with property maintenance and taxes, among other things. While any single property is high risk because there's one tenant, across the massive scale of Realty Income's portfolio, the risk is extremely low. And while this approach isn't unique to Realty Income, it does add to the allure of the monthly dividend checks you'll collect from this REIT.

The fly in the ointment

One of the main negatives here is that net lease REITs like Realty Income are often considered bond proxies. Thus, as interest rates have risen, the company's stock has fallen. If rates continue to rise, there could be more downside here. A key difference between Realty Income and a bond, however, is the REIT's proven ability to increase its dividend (bond payments are generally set in stone). All in all, if you are a conservative dividend investor looking for a reliable dividend stock, Realty Income should probably be on your radar right now.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool recommends Realty Income. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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