The S&P 500 has essentially doubled off its bottom in 2020, with 70 new all-time highs in 2021. As its dividend yield has dropped to 1.2%, it has become challenging for income-oriented investors to identify stocks with attractive dividends.

Realty Income (O) is a bright exception. The stock is offering a 4.1% dividend yield, with a wide margin of safety, it has an exceptional dividend growth record and offers monthly dividends.

It is also one of only 3 REITs currently on the list of Dividend Aristocrats.

Therefore, it is ideal for income-oriented investors.

Business Overview

Realty Income is a REIT focused on retail properties. It has become famous for its exceptional dividend growth history and its monthly dividend payments. The trust owns more than 4,000 properties. Realty Income owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This feature is of paramount importance, as it renders Realty Income resilient to the secular decline of malls.

Many REITs have come under pressure due to the coronavirus crisis, which has severely hurt many tenants. Realty Income has proved one of the most resilient REITs to the pandemic thanks to the high quality of its properties. The trust has posted record funds from operations (FFO) per share in each of the last two years.

In the third quarter, Realty Income grew its revenue by 22% and its FFO per share by 12% over the prior year’s quarter, primarily thanks to the acquisition of several properties in the last 12 months. In addition, thanks to its sustained business momentum, the company raised its guidance for its annual FFO per share from $3.53-$3.59 to $3.55-$3.60. At the mid-point, the revised guidance implies 5.5% growth over the prior year.

Moreover, management initiated guidance for FFO per share of $3.84-$3.97 in 2022. At the mid-point, this guidance corresponds to 9.1% growth over 2021. This is certainly an attractive growth rate for a REIT, which confirms the ongoing strong recovery of the trust from the pandemic.

Growth Prospects

Realty Income pursues growth by acquiring new properties and by raising rents at existing locations, either via contracted rent increases or by leasing properties to new tenants at higher rates. Realty Income invested about $3.7 billion in new properties in 2019, and another $2.1 billion in 2020.

The trust also expects to increase its investments in international markets over the next couple of years. It executed its first deal in the UK in 2019 and plans to pursue many more deals in the country in the future.

Realty Income has grown its FFO per share at a 5.9% average annual rate over the last decade. More importantly, it has consistently grown its bottom line, every single year for more than a decade. Given the reliable growth trajectory and the strong business momentum of the REIT, we expect it to grow its FFO per share by at least 4.0% per year on average over the next five years.

Dividend

Realty Income pays its dividends on a monthly basis and boasts an impressive dividend growth record. To be sure, the REIT has grown its dividend for 96 consecutive quarters. As this period includes two recessions and the coronavirus crisis, the dividend growth streak is certainly admirable.

The stock is currently offering a 4.1% dividend yield. Moreover, thanks to its disciplined business model, Realty Income spends less than 1% of its net operating income on capital expenses. As a result, it enjoys excessive free cash flows and funds from operations. Its payout ratio now stands at 79%, which is a nearly decade-low level. Given also the reliable cash flows of Realty Income, it is safe to expect the REIT to continue raising its dividend for many more quarters.

Final Thoughts

Realty Income is offering a 4.1% dividend yield, with monthly dividend payments. It also has one of the most impressive dividend growth streaks in the REIT universe, with 96 consecutive quarters of dividend growth. Given also the consistent growth record of the REIT, its proven resilience to recessions and its promising growth prospects, income-oriented investors should include this high-quality REIT in their portfolio.