Realty Income’s (NYSE:O) monthly dividend stands out in the current market climate due to the company’s exceptional reputation, impressive track record of dividend growth, and noteworthy dividend yield.
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As investors seek stability during market volatility, monthly dividend stocks have gained popularity. Not all monthly dividend stocks are equal, though, and the frequency of payouts alone does not necessarily imply a sound investment. Yet, Realty Income possesses a blend of essential qualities, such as astute capital management, sustained growth, and ample room for further dividend growth ahead. With these traits in mind, it is one of my favored options among its monthly dividend peers. Therefore, I am bullish on the stock.
Prudent Capital Management Drives Success
Realty Income stands out among its monthly dividend peers due to its prudent management practices, which are reflected in its impressive 26-year dividend-growth track record — the longest among all monthly dividend companies.
Its ability to sustain this track record even during periods of extreme market volatility, such as the Great Financial Crisis and the COVID-19 pandemic, is a testament to its rigorous capital allocation methods and long-term approach to investing. Do you remember how the pandemic severely impacted retail real estate in particular? Well, Realty Income has emerged stronger than ever, achieving record-breaking financial results in 2022.
Last year’s record-breaking figures can be attributed to the company’s portfolio expansion, ending the year with 12,237 properties (1,101 more than in 2021) and higher same-store rent, resulting in a staggering 60.6% increase in revenues to $3.34 billion. With such a considerable increase in revenues, Realty Income achieved economies of scale, as its expenses didn’t rise by an equally significant rate.
General & Administrative expenses, for instance, “only” grew by 42.8%, resulting in its normalized FFO (funds from operations, an earnings metric used by REITs) growing by an even more impressive 76.6% to $2.49 billion.
Realty Income’s capital management practices were once again demonstrated through the highly-accretive nature of its property expansion on a per-share basis. Despite raising $4.6 billion from the sale of common stock to fund these property purchases, which notably lifted its share count, its AFFO (adjusted funds from operations) per share still rose by an impressive 9.2% to $3.92.
While the majority of REITs, particularly those in the retail space, concentrated on preserving liquidity and optimizing their portfolios last year in response to rising interest rates, Realty Income took a bold approach and shifted into growth mode. Despite a sluggish market, the company pursued highly-accretive opportunities, displaying its capability to stay ahead of the curve once again.
Is the 4.75% Dividend Yield Attractive Enough?
Realty Income’s 4.75% dividend yield is looking less attractive these days, and rightfully so. With interest rates on the rise, investors now have access to competitive yields from “risk-free” government bonds, which requires equities to trade with a much higher risk premium relative to a few years back. This is why despite Realty Income posting its best results in its history last year, the stock is currently trading at the same levels it did all the way back in mid-2016.
But before we dismiss Realty Income’s dividend, we have to take into account its growth prospects, which appear to be the best in quite some time. Specifically, after an exceptional year in 2022, the company’s payout ratio is near its lowest point in over a decade.
While the company paid out $2.967 per share in dividends per share last year, 4.7% higher than the $2.833 per share paid in 2021, the much larger increase in AFFO per share led to the payout ratio dropping from 79% to 76% in 2022. This is significantly lower than the near-90% payout ratio about 10 years ago, which implies ample room for comfortable dividend hikes in the short-to-medium term.
Realty Income’s potential for consistent dividend growth is also bolstered by its portfolio of properties boasting a weighted average remaining lease term of roughly 9.5 years. This attribute affords the company an exceptional level of cash-flow predictability, facilitating the process of scheduling future dividend increases with ease.
Earlier in March, Realty Income announced an increase in the company’s monthly cash dividend to $0.2550, which is 0.2% higher than the previous month’s dividend, and 3.2% higher than the prior year’s March dividend. It was also Realty Income’s 633rd consecutive monthly dividend and its 120th dividend increase since its public listing.
Therefore, even though the 4.75% yield in itself may not be as compelling these days, the frequency of payouts, management’s commitment to expanding its already legendary dividend-growth streak, and the comfortable payout ratio, create an unparalleled level of reliability that is rarely found in other stocks.
Is Realty Income Stock a Buy, According to Analysts?
Turning to Wall Street, Realty Income has a Moderate Buy consensus rating based on four Buys and six Holds assigned in the past three months. At $69.75, the average Realty Income price target suggests 11.26% upside potential.
The Takeaway
Shares of Realty Income have faced headwinds recently, as rising rates have encouraged investors to look for alternative income opportunities that offer equally appealing yields with reduced risk.
That said, the company continues to demonstrate operational excellence and is well-positioned to keep growing its monthly dividend at a satisfactory pace. Despite Realty Income’s financial performance reaching new heights in 2022, its stock has been trailing, pushing the stock’s forward price/FFO ratio at approximately 15.4.
This is a rather inexpensive multiple based on the company’s underlying growth rates. Besides pointing toward upside potential, it also acts as a decent safety net against further market volatility. Thus, when all these points are taken into account, Realty Income remains a top monthly dividend pick for income-oriented investors, in my view.
