Net-lease REIT Realty Income Corporation (NYSE: O) recently announced a 4% dividend increase, which represents the 95th time the payout has been raised since the company's 1994 NYSE listing. Here's a rundown of Realty Income's incredible dividend history and why you shouldn't worry about the company's retail-oriented property portfolio.
It's tough to find a stock with a better dividend history
As I mentioned, Realty Income just announced its 95th dividend increase since listing on the NYSE in 1994. The monthly dividends, of which Realty Income will have paid 571 in a row, are going up by 4% from $0.2125 to $0.219 ($2.628 annualized). Based on the current stock price, this brings Realty Income's dividend yield to just under 5%.
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Over the years, Realty Income has increased its dividend at a compounded rate of 4.7% per year. Generally, the company will declare one large dividend increase in the beginning of the year (that's this one) and several smaller ones throughout the year.
Realty Income likes to raise its dividend quarterly, at a minimum, and has done so for 81 consecutive quarters -- more than 20 years. The dividend will often increase even more frequently if the company is doing particularly well. Out of the past 15 years, the company has increased its dividend five times or more in 10 of them.
But retail is risky, right? How is Realty Income so consistent?
There are two main components that allow Realty Income to grow its revenue and increase its dividend in such a consistent and predictable manner. First, the company's lease structure is designed for stability. And second, most of Realty Income's tenants operate recession-resistant businesses.
Realty Income's tenants sign "triple-net" leases. This is a long-term lease agreement, and most of Realty Income's tenants' leases have initial terms of 15 years or longer, generally with annual rent increases included. Tenants are responsible for most ongoing and variable costs of property ownership -- specifically taxes, insurance, and maintenance. So not only are the tenants locked in for years, minimizing turnover, but Realty Income's expenses once it has a tenant in place are next to nothing. In fact, the company's gross profit margin is more than 98%.
Most of the retail tenants (about 20% of the portfolio is industrial and office properties) fall into one or more of three recession-resistant or e-commerce-resistant categories.
- Service/Experiential: These are businesses that people need to physically go to, such as theaters, gas stations, and fitness centers, and are naturally resistant to e-commerce headwinds. Examples of major tenants from Realty Income's portfolio include AMC Theaters, LA Fitness, and 7-Eleven.
- Non-Discretionary: These businesses sell things people need, as opposed to things people want. Drug stores are a great example -- not only do they sell things people need, but they sell things people generally need in a timely manner. CVS, Walgreens, and Rite-Aid are all top Realty Income tenants.
- Low Price Point: Businesses with a discount orientation tend to do fine during recessions and compete well against e-commerce giants like Amazon. For example, dollar stores like Dollar General and warehouse clubs like BJ's Wholesale often offer bargains that simply can't be matched online.
A rock-solid stock with a 5% yield and lots of growth potential
In addition to a high-yield and incredible dividend history, Realty Income also has the capability of delivering market-beating returns. And over the 24 years it has been listed on the NYSE, it has done just that, delivering annualized total returns (dividends + stock price gains) of 16.4% over that time. To put this into perspective, if you had invested $10,000 at the time the company first listed on the NYSE in 1994, your investment would be worth roughly $383,000 today.
To be clear, Realty Income's past performance isn't a guarantee that it will perform as well in the future. However, with a proven recipe for consistent growth and income, there's no reason to believe that Realty Income's record of strong returns will be in jeopardy anytime soon.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel owns shares of Realty Income. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.