Is Realty Income (O) Still the Best Monthly Dividend Stock?

Summary

In this video, Ryan Bolinger analyzes Realty Income, a popular REIT known for its monthly dividends and nearly 30 years of consistent growth. Despite recent share price pressures due to rising interest rates and sector challenges, the company maintains a safe dividend, supported by a stable AFFO payout ratio, strong balance sheet, and long-term triple net leases. Realty Income’s yield is around 6%, with moderate 2–3% annual growth potential. While growth opportunities are more limited for the large REIT, its diversified tenant base and defensive income stream make it an attractive option for investors seeking stable, reliable dividends in retirement portfolios.

Takeaways

• 🏢 Realty Income is a retail REIT founded in 1969, known for paying monthly dividends and providing long-term stable returns.
• 📉 The stock has recently underperformed, with current share prices near pandemic lows, partly due to rising interest rates.
• 💰 Realty Income's dividend yield (~6%) is historically in line with the spread over 10-year Treasury yields, reflecting interest rate sensitivity.
• 🛡️ The Simply Safe Dividends score for Realty Income is 80, categorizing its dividend as safe with a high likelihood of sustainability.
• 📈 Realty Income has a long track record of dividend growth, with 29 consecutive years of raises and consistent payouts since 1969.
• 💵 The REIT’s AFFO payout ratio is around 75%, indicating a sustainable dividend coverage and strong cash flow.
• 🏦 Realty Income maintains stable leverage (net debt to EBITDA 5–6x) and holds an A– credit rating, supporting its dividend payments.
• 🌱 Growth prospects are moderate due to Realty Income’s large size and acquisition-driven strategy, requiring significant investment to increase AFFO.
• 🏬 Tenant risks exist as some major clients like Walgreens, CVS, and Family Dollar are shrinking, but diversified leases and triple-net agreements reduce exposure.
• 📊 Realty Income is suitable for income-focused portfolios seeking defensive, predictable monthly dividends, but investors must consider interest rate sensitivity.
• 🌍 The company has diversified into casinos and data centers, but no single non-core industry exceeds 10% of revenue, maintaining stability.
• 🔑 Overall, Realty Income offers a combination of safe dividend income, moderate growth potential, and defensive real estate exposure, making it attractive for retirement portfolios.

Q & A

What company is the focus of the video and what type of investment is it?

The video focuses on Realty Income, which is a retail-focused Real Estate Investment Trust (REIT) that pays monthly dividends.

What is Realty Income's current dividend yield and how long has it been paying safe dividends?

Realty Income currently offers a dividend yield of around 6% and has paid safe dividends every year since the company's founding in 1969.

How has Realty Income performed relative to the S&P 500 since going public?

Realty Income has nearly doubled the S&P 500's total return over nearly 30 years since it went public.

How do interest rates affect Realty Income's stock price and dividend yield?

Realty Income's dividend yield is closely correlated with the 10-year Treasury yield. As Treasury yields rise, the stock price tends to drop, pushing its dividend yield higher, and vice versa.

What is the Simply Safe Dividends score for Realty Income and what does it indicate?

Realty Income has a dividend safety score of 80, which falls in the 'Safe' category. This indicates a strong likelihood that the company can maintain its dividend even during economic downturns.

What is Realty Income’s AFFO payout ratio and why is it important?

Realty Income's AFFO (Adjusted Funds From Operations) payout ratio is around 75%. This ratio measures the percentage of cash flow paid as dividends, and a reasonable ratio indicates the dividend is sustainable.

How has Realty Income managed tenant risks and store closures?

Realty Income mitigates tenant risks by focusing on high-demand locations, creditworthy tenants, and long-term triple-net leases. While some tenants like Walgreens, CVS, and Red Lobster are shrinking, the company remains resilient due to diversification and long-term contracts.

What recent expansions has Realty Income pursued outside its core retail properties?

Realty Income has expanded modestly into the casino industry in 2022 and data centers in 2023. These sectors represent small portions of revenue and are considered low-risk expansions.

What are the main growth challenges Realty Income faces?

The company has grown large, making significant AFFO growth challenging. High borrowing costs and limited profitable property acquisitions slow growth, with $1 billion investments needed to increase AFFO by only 0.5%.

What makes Realty Income attractive for retirement or defensive income portfolios?

Realty Income offers a safe, predictable monthly dividend, a defensive and diversified rental income stream, and moderate growth potential. Investors seeking steady income and lower volatility may find it suitable for retirement portfolios.

How has Realty Income historically performed during economic downturns like the pandemic?

During the pandemic, Realty Income continued to grow AFFO steadily, demonstrating resilience due to long-term leases and diversified tenants, even when some retail tenants temporarily closed.

Why does Realty Income use AFFO instead of net income to evaluate dividends?

AFFO adjusts for non-cash items like depreciation on properties, providing a more accurate measure of a REIT’s cash flow and its ability to sustain dividends compared to traditional net income.