Many investors rely on Realty Income (NYSE: O) to generate passive income. It’s the largest real estate investment trust (REIT) currently yielding north of 5%, twice as big as the second-largest player by market cap. Realty Income also has a long streak of dividend hikes, which is a testament to stellar management and the conservative construction of its portfolio and business model.
How many shares do you need to buy to generate $2,500 a year in dividend checks? The short answer is 768 shares, but that’s today’s response. Let’s take a closer look at why Realty Income is so successful, and why it won’t take long for today’s answer to change.
Missed AI’s “Act 1”? Act 2 Could Be 14x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
Taking it month by month
Realty Income’s latest monthly distribution — yes, monthly — is $0.2715 per share. Offering investors monthly dividend checks is becoming trendy these days, but Realty Income has been doing so for more than 56 years. It has shelled out 676 consecutive monthly payouts.
At an annualized rate, this amounts to $3.258 per share in distributions over 12 monthly payments. Divide $2,500 in desired annual income into that rate, and you arrive at 768 (technically, 767.4) shares to get there. Realty Income stock enters this new trading week at $56.89, so an investment of $43,692 would be required for 768 shares.
It adds up over time
Realty Income’s run of uninterrupted monthly dividend declarations isn’t the only winning streak for Realty Income and its investors. It has increased its dividend for 31 consecutive years since going public. Even better, Realty Income has boosted its monthly disbursements for 116 straight quarters.
The secret sauce is Realty Income’s model and its sector concentration. Commercial tenants at Realty Income’s more than 15,000 properties enter into triple-net leases. With the tenants on the hook for property taxes, insurance, and routine maintenance expenses, the revenue stream is predictable, aside from the risk of defaults.
The REIT favors largely consumer-facing retail businesses. This is typically risky and leaves it sensitive to economic swings, but its largest industry concentration — supermarkets and convenience stores — is historically recession-resistant. This makes up more than 20% of its portfolio.
The art of rising payouts
Realty Income has a strong history of shrewd acquisitions and healthy organic growth. Its operating profit has outpaced its growing share count. Even after years of hikes, its trailing 12-month distributions are just 75% of its funds from operations. The breathing room is there to keep the hikes coming.
