Real estate income (NYSE:O) is an incredible dividend stock. The Real Estate Investment Trust (REIT) goes much further than other dividend payers. It pays a monthly dividend (instead of quarterly payouts), offers a high yield (5.6% versus 1.5% for the S&P500), and routinely increases payments (quarterly for more than a quarter century compared to annual increases).
The REIT should be able to continue to offer its investors more income in the future. That makes it an ideal option for those who want to generate passive income.
No matter how predictable it is
Realty Income recently raised its dividend for the fifth time this year. While it was a modest wage increase (0.2% above the previous payment level), Realty Income has increased its dividend by 3.2% over the past year. The latest increase was the company’s 123rd since going public in 1994:
A number of factors have allowed the REIT to achieve such consistent dividend growth. It all starts with a rock-solid foundation. The REIT owns commercial real estate that generates sustainable income. Realty Income also has a very strong financial position.
Realty Income owns a diversified portfolio of properties (primarily retail, industrial and gaming) that are resilient to economic downturns and insulated from the pressures of e-commerce. It rents its properties to high-quality tenants under triple-net (NNN) agreements that require them to cover variable expenses such as building insurance, property taxes and maintenance. These lease agreements often contain clauses for annual rent increases. These features allow it to generate very stable and steadily increasing rental income.
The company also has a very solid financial basis. It is one of only eight REITs with at least two A ratings from the major credit rating agencies. Meanwhile, despite its high dividend yield, the country has a conservative dividend payout ratio for the sector (75.1% of its adjusted funds from operations (FFO) in the third quarter).
That strong financial foundation gives Realty Income the flexibility to invest in additional income-producing real estate. These new additions, combined with growing rental income, increase adjusted FFO per share. This allows the REIT to steadily increase its dividend.
More growth ahead
Real estate income should continue to grow in the future. The REIT aims to increase adjusted FFO per share by 4% to 5% annually over the long term. This is roughly in line with the historical rate (5% per year since 1996).
The company is in a strong position to achieve that goal next year. It agreed to acquire a fellow REIT Geest Real Estate in a $9.3 billion deal. Realty Income expects the transaction to increase adjusted FFO per share by more than 2.5% next year. Meanwhile, it will increase its size, scale and diversification and expand its future growth opportunities.
The REIT has also made a concerted effort to continue diversifying its portfolio and opening new growth avenues. For example, it was created recently first investment in the data center sector. It will help finance two facilities under development data center REIT Digital real estate which should come online next year. The initial phase will have a data center capacity of 16 megawatts (MW), which the partners can expand to 48 MW in the future.
Data centers are one of several new business sectors the company has added in recent years. It has also expanded into the gaming, vertical farming and consumer-facing medical sectors, added a credit investment platform and made its first investments in Italy and Ireland. These new growth areas add to the company’s already significant investment opportunities. There is an estimated $12 trillion of real estate in the US and Europe that is suitable for the net lease structure.
A top-shelf income share
Realty Income is one of the best dividend stocks. It pays a monthly high-yield dividend that it routinely increases. That steady growth should continue into 2024 and beyond. Therefore, it is a top option for those looking for a steadily increasing income stream.
Should you invest €1,000 in real estate income now?
Consider the following before purchasing shares in Realty Income:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor service has more than tripled the return of the S&P 500 since 2002*.
View the 10 stocks
*Stock Advisor returns December 11, 2023
Matthew DiLallo has positions in Digital Realty Trust and Realty Income. The Motley Fool holds and recommends Digital Realty Trust and 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.