This 5.6%-Yielding Monthly Dividend Stock Continues to Prove It's a Must-Own Passive Income Investment

Realty Income (NYSE: O) recently reported its third-quarter financial results. They showcased the strength of the real estate investment trust's (REIT) dependable and durable business model. It delivered steady growth despite the continued headwinds from higher interest rates.

The REIT's ability to deliver stable and steadily rising earnings, which support its 5.6%-yielding monthly dividend, makes it a must-own stock for those seeking to collect passive income.

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Built to deliver reliability

"Realty Income has built a durable and diversified engine for income, which is illustrated in our third-quarter results," stated CEO Sumit Roy in the third-quarter earnings report. The REIT generated $992 million, or $1.08 per share of adjusted funds from operations (FFO), in the period, representing a 3% increase on a per-share basis compared to last year. It was able to deliver steady earnings growth even though interest rates remain elevated, which has increased its borrowing costs.

The company benefited from the stability of its well-diversified real estate portfolio (retail, industrial, gaming, data centers, and other properties). Long-term net leases with built-in escalation clauses provide it with highly durable rental income that rises by around 1% each year. Meanwhile, the company continues to capture higher rental rates as legacy leases expire. Through the first nine months of this year, Realty Income has signed new and renewal leases at 103.5% of the expiring lease rates on the same space, boosting its annualized rental income from these properties from $206.5 million to $213.7 million.

Additionally, it's using the power of its proprietary predictive analytics AI tool to proactively sell properties before they become potential problems. It sold 140 properties during the quarter for $215 million of net proceeds, bringing its year-to-date total to 268 properties for $424.2 million in proceeds. That's giving it additional capital to recycle into higher-quality real estate investments.

Realty Income's high-quality portfolio provides it with steady income to pay its 5.6%-yielding monthly dividend. The REIT currently pays out about 75% of its adjusted FFO in dividends each quarter. It retains the rest to invest in additional income-generating properties. It's on track to produce nearly $850 million in free cash flow after paying dividends this year.

Multiple avenues to grow

Realty Income invested nearly $1.4 billion into new properties during the third quarter. That brought its year-to-date total to $3.9 billion. Those investments helped contribute to its adjusted FFO per share growth this year.

The REIT made the bulk of its new investments in Europe during the third quarter ($1 billion). It focused on Europe because it was able to secure a much higher weighted average cash yield on new investments (8% compared to 7% on new U.S. investments). The bulk of its latest investments were in retail properties (78.6% during the quarter), with the remainder invested in industrial properties (21.4% in the quarter).

While most of its new investments were in stabilized real estate, Realty Income also invested $148.3 million into real estate development projects during the quarter and $370.3 million year-to-date. Additionally, it has invested $807 million in real estate-backed loans this year.

Realty Income's ability to invest across locations, property types, industries, and the capital stack (e.g., equity or debt) puts it in a strong position to continue growing its portfolio. The company also has tremendous access to capital, enabling it to continue funding new investments. It's on track to internally generate over $1 billion of capital from non-core asset sales and post-dividend free cash flow this year. Additionally, its top-tier balance sheet provides it with access to lower-cost debt funding even in the currently elevated interest rate environment. Realty Income recently issued $800 million of senior notes with interest rates of 3.95% and 4.5%. It can also selectively issue equity (it settled $319.7 million of stock sales during the quarter) to fund new investments. Finally, the REIT recently launched its U.S. private fund business, which it seeded with $80.1 million of new investments made during the quarter.

This abundance of capital sources drives Realty Income's expectation that it can invest $5.5 billion into new real estate this year. That's a $500 million increase from last quarter and up from its initial $4 billion target at the start of the year.

Along with rent growth, these new investments support the REIT's ability to steadily increase its dividend. Realty Income has increased its monthly payment 132 times since its public listing in 1994, and for the past 112 quarters in a row. It has raised its payment by 2.3% over the past year and grown it at a 4.2% compound annual rate over the last three decades.

A foundational passive income investment

Realty Income is the perfect example of a passive income investment. The REIT's high-quality real estate portfolio is an income-producing machine. Meanwhile, its diversified business model and capital sources provide it with the flexibility to continue investing in expanding its portfolio, allowing it to produce more income to grow its monthly dividend. These features make it a must-own investment for those seeking to generate reliable passive income.

Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.