The past 28 years have been pretty eventful, including several market crashes and a couple of recessions, among other headwinds. But Realty Income (NYSE:O) hasn’t skipped a beat, paying its monthly dividend through thick and thin. And on top of that, Realty Income has increased the payment every single year during that span, making it a Dividend Aristocrat, one of a small number of companies that have raised their dividends for 25 consecutive years or more. If that sounds attractive, now add a 4.2% dividend yield to the mix.
Here’s why you’ll love this landlord, no matter what’s going on in the market.
A solid core
The base of Realty Income’s portfolio is single-tenant properties where the tenants are responsible for most of the operating costs of the buildings they occupy. This is what’s known as a net-lease property in the real estate investment trust (REIT) industry. Although there’s notable risk at each individual property, because only one tenant is involved, net-lease investing is fairly low risk if spread over a large portfolio. Realty Income is the market leader in the net-lease industry with more than 10,000 properties.
Being the largest net-lease company brings a number of advantages. For example, Realty Income spreads its operating costs over a huge base, allowing it to be extremely efficient. It also has the ability to make large acquisitions that smaller peers can’t take on. And, given its investment-grade credit rating backed by a sound balance sheet, Realty Income has ready access to capital markets to raise cheap funding through stock and bond sales. It really does stand out from the pack.
Indeed, while Realty Income has grown into the company that it is today (a big merger in 2021 materially increased its scale), it has long been a net-lease industry bellwether.
That said, where is it going from here?
Exploring new shores
Aside from being able to buy at a scale that its competitors couldn’t handle, Realty Income has recently broadened its reach to Europe. The company’s management estimates that the region is an $8 trillion market opportunity, which is roughly twice as large as the $4 trillion U.S. market. Although foreign assets make up a modest 10% or so of the REIT’s portfolio today, that’s likely to increase, perhaps notably, over time.
But what about competition? There are only three publicly traded U.S. REITs that operate in Europe right now in a market that is still just beginning to embrace the net-lease structure. They have a combined enterprise value, according to Realty Income, of about $6 billion. Compare that to the U.S. market, where there are 14 competitors with a total combined enterprise value of $145 billion. In other words, Realty Income is entering a bigger market, with fewer competitors.
The key, however, is that Realty Income is also bringing with it an impressive history and industry-leading scale. So it is quickly finding property owners who are happy to work with the company, as it seeks out reliable partners to help support growth efforts. Right now the focus has been on grocery stores, with a couple of notable deals in the U.K. and Spain. However, Realty Income’s portfolio spans retail, warehouse, and industrial properties, so it’s not unreasonable to expect the REIT to branch out even more in the future.
Even better in a downturn
The key here is that, given Realty Income’s size and financial strength, it should be able to continue expanding in the U.S. and, more importantly, abroad, without getting tripped up by minor setbacks in the market. Sure, a big market downturn might slow the company’s growth, but it won’t stop it and the dividend should keep on growing, as it did even in pandemic-hit 2020. In fact, a bear market would likely be a great opportunity to add even more of this REIT’s shares to your portfolio if Realty Income’s stock takes a hit.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.