Prediction: Buying Realty Income Today Could Set You Up for Life

Key Points

• Realty Income is the largest net lease real estate investment trust.

• The company is a slow and steady income tortoise.

• Conservative income investors should consider buying Realty Income to enjoy a lifetime of reliable dividends.

• 10 stocks we like better than Realty Income ›

Realty Income (NYSE: O) has trademarked the nickname "The Monthly Dividend Company." That was kind of a gutsy move, but it says a lot about what this real estate investment trust (REIT) is focused on. The big picture is that Realty Income is a great choice for long-term income investors who are trying to set themselves up with reliable streams of dividends. Here's a deeper dive into this attractive high-yield investment opportunity.

What does Realty Income do?

Realty Income is a net lease REIT. That means that it owns single-tenant properties, but rents them out under contracts that make the tenants responsible for most property-level operating costs. That may seem weird. Why would tenants want to take on property-level costs? Because it gives them effective control of the property.

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Image source: Getty Images.

Usually, a net lease is signed when a company sells a property to a REIT and then instantly leases it back. These are often long-term leases with regular rent increases built into them. The property in question is likely to be important to the business, but if the seller wants to free up cash so it can do other things, like invest for growth, a deal like this is a solid way to do that. Net lease real estate investment trusts like Realty Income are happy to buy properties in what are, effectively, financing transactions. The results of those deals give them reliable tenants and low-maintenance assets.

Realty Income is the largest player in the space, with a $53 billion market cap -- that's nearly four times larger than its next closest peer. It owns 15,600 properties. Around 75% of its rents come from properties occupied by retailers. Those sites are generally pretty similar to each other, so they are easy to buy, sell, and re-lease as needed. The balance of the portfolio is made up of a mix of industrial properties and "other" assets such as data centers and casinos.

On top of its property type diversification, Realty Income has geographic diversification. Unlike many of its net lease REIT peers, it has exposure to both the North American market and to countries across Europe. Moreover, given the company's size, management has been looking into other avenues for growth, including offering services to institutional investors and providing debt financing to tenants. Realty Income is a well-rounded business.

The pros and cons of Realty Income's size

Being so large is not all good. Notably, it takes a lot of investments in new properties to meaningfully grow the top and bottom lines on its income statement. That's why Realty Income has increasingly been investing in Europe, a region where the net lease approach is fairly new. It is also why management has been reaching into asset management services and looking at debt financing. It's trying to increase the number of levers it can pull to support its long-term growth. Overall, Realty Income is likely to be a slow and steady tortoise.

That said, being large also has benefits. Realty Income has greater access to capital markets, and its investment-grade-rated balance sheet gives it an edge on financing costs. Its size also means that it likely sees every material deal that comes to market, and it can take on transactions that smaller peers couldn't handle alone.

All this background is what supports a dividend that management has increased annually for three decades and counting. But there's more to this dividend story. Realty Income distributes its payouts monthly, which makes the dividend as close to a paycheck replacement as investors can get. And within that 30-year annual streak of hikes is a quarterly streak that is now 111 quarters long. So these "paychecks" don't just come with annual raises -- they come with quarterly pay bumps.

O Dividend Yield data by YCharts.

Now add in Realty Income's well-above-market 5.4% dividend yield, and you'll see why income-focused investors looking to set themselves up with a lifetime of dividends would want to buy this net lease REIT giant.

Realty Income: A strong foundation in more ways than one

Realty Income's dividend rests upon a strong foundation. That's the key takeaway here, and why it can set you up for life on the income front. But think about the foundation that it can create for your portfolio. With that lofty yield locked in, you can balance that by buying some stocks that have lower yields now, but that are likely to provide faster dividend growth. Even if you don't go down that route, slow and steady income from a high-yielding industry leader like Realty Income is hard to complain about.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.