4 Reasons to Buy High-Yield Realty Income (O) Stock Like There's No Tomorrow

Key Points

• Realty Income is a Real Estate Investment Trust, or REIT.

• It recently yielded 5.4%.

• It has a winning business formula.

• 10 stocks we like better than Realty Income ›

If you're not familiar with Realty Income (NYSE: O), you might want to rectify that situation. It's a well-known and well-regarded dividend-paying stock in the dividend realm, and it's also a real estate investment trust (REIT) -- a company that owns many real estate properties, charging its tenants rent. REITs are required to pay out at least 90% of their taxable earnings as dividends.

Read on to see why this stock might be a good fit for your long-term portfolio.

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1. Buy Realty Income for the income

Realty Income's dividend yield was recently a fat 5.4%. Better still, while most dividend payers pay their shareholders on a quarterly basis, Realty Income pays its dividends out monthly and calls itself "The Monthly Dividend Company." For retirees, that monthly income can be a nice substitute for a monthly paycheck.

The company has paid 663 consecutive dividends, equivalent to more than 55 years' worth, and has increased its payout 132 times since it went public in 1994.

Here's what a 5.4% dividend yield can mean for you: If you invest, say, $5,000 in the stock, you can expect about $270 in dividend income for the year -- though you might get a bit more if a dividend hike occurs during the year. Invest $10,000 and collect around $540. Over time, your dividend income from the stock will increase, too.

2. Buy Realty Income because it's undervalued

Here's another big plus: Realty Income's stock looks attractively valued at recent levels, with a recent forward-looking price-to-earnings (P/E) ratio of 34.7 well below its five-year average of 41.5.

Its price-to-sales ratio, meanwhile, was recently 10, a bit below the five-year average of 11.

3. Buy Realty Income because of its strong business

Realty Income has a solid business model, widely employing "triple-net leases," which has the lessee on the hook for covering real estate taxes, property insurance, and operating expenses. This is a good deal for the lessor, Realty Income, and in exchange for this arrangement, its leases tend to feature tiny annual rent increases, often around 1%.

Since it can't grow its business too quickly via 1% increases, it's largely grown via acquisitions. Since 2010, Realty Income has invested some $52 billion in properties.

As of mid-year, Realty Income's portfolio of properties featured full or partial ownership in 15,606 properties, leased to 1,630 clients operating in 91 industries. These properties are diversified, too, not only by industry but also geographically and by client and property type. This kind of diversification can reduce risk, shrinking the impact of a blow to a particular industry.

Meanwhile, the company's portfolio occupancy rate was an impressive 98.6% as of mid-year. And its portfolio is somewhat resistant to recessions, with convenience stores, grocery stores and dollar stores as its top three industries.

Realty Income's top tenants recently included 7-Eleven, Dollar General, Walgreens, and Dollar Tree. Other tenants include Whole Foods, Lowe's, and Chipotle Mexican Grill.

4. Buy Realty Income because of falling interest rates

Then there are interest rates. The Fed recently cut rates by a quarter of a percent, and that bodes well for Realty Income, because lower interest rates can mean lower costs of acquisitions. And Realty Income depends on acquisitions to help it grow, because most of its lease agreements feature very low annual increases.

Lower interest rates (with the Fed expecting further cuts this year) may also give Realty Income the opportunity to refinance some of its debt, reducing its interest expenses.

5. Buy Realty Income because of its growth prospects

Finally, consider buying into Realty Income because of its solid growth prospects. It's well-run and has a proven business model, locking tenants into long-term leases and adding more properties and tenants over the years.

Should you invest $1,000 in Realty Income right now?

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Selena Maranjian has positions in Realty Income. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Realty Income. The Motley Fool recommends Lowe's Companies and recommends the following options: short September 2025 $60 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.