Dividend Aristocrats In Focus: Realty Income

When it comes to dividend growth stocks, the Dividend Aristocrats are the “cream of the crop”. These are stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases. This is why we recommend long-term investors looking for the best stocks, first consider the Dividend Aristocrats.

At the same time, Real Estate Investment Trusts (REITs) seem like natural fits for the Dividend Aristocrats. REITs are required to distribute at least 90% of their earnings to shareholders, which leads to steady dividend growth for the asset class, provided earnings grow over time.

And yet, there are only three REITs on the list of Dividend Aristocrats: Federal Realty Investment Trust (FRT), Essex Property Trust (ESS), and Realty Income (O). The reason for the relative lack of REITs in the Dividend Aristocrats Index is primarily due to the high payout requirement of REITs. It’s difficult to grow dividends year-in-and-year-out when the bulk of income is being distributed, as this leaves little margin for error.

Realty Income has a very impressive dividend history, particularly for a REIT. Realty Income has increased its dividend for 25 years in a row, enabling it to recently join the list of Dividend Aristocrats. It is also a monthly dividend stock, meaning it pays shareholders 12 dividends each year instead of the more typical quarterly payment schedule.

This article will discuss this brand new Dividend Aristocrat in more detail.

Business Overview

Realty Income was founded in 1969 and is headquartered in San Diego. It is a retail-focused REIT that has become famous for its successful dividend growth history and monthly dividend payments, even labeling itself “The Monthly Dividend Company.” The trust employs a highly scalable business model that has enabled it to grow into a massive landlord of more than 4,000 properties with a market cap of $25 billion.

While many retail landlords are struggling in the age of Amazon (AMZN) and e-commerce, Realty Income continues to thrive because it owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This means that the properties are viable for many different tenants, including government services, healthcare services, and entertainment.

In fact, Realty Income owns a highly diversified portfolio by industry, tenant, and geography. Approximately 96% of its rent comes from e-commerce and recession-resistant tenants, making it a good bond substitute. The company also has exposure to industrial, office, and agricultural tenants, though retail does make up the vast majority (82.7%) of its rental income. The company derives rental income from all over the United States as well as the United Kingdom, insulating itself against regional challenges.

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