This Dividend Stock's Moat Is as Wide as It Gets. 3 Reasons to Buy and Hold Forever.

When it comes to investing, prospective shareholders often overlook real estate stocks like Realty Income (NYSE: O). This is likely because they tend to generate slower growth and less excitement than counterparts in technology and other fast-growth industries.

Fortunately, Realty Income makes up for that lack of excitement with its stability and the strength of its competitive moat. Specifically, three reasons explain why investors may want to buy stock in the real estate investment trust (REIT) and never sell.

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1. A diverse, stable client base

Realty Income specializes in single-tenant, net-leased properties. Under these agreements, tenants pay the insurance, maintenance costs, and taxes on the property. This ensures Realty Income maintains a steady revenue stream for rent with fewer worries about unexpected expenses.

However, aside from the lease agreements themselves, the strength of its competitive moat appears to revolve around its client base. Many of the world's best-known companies, such as Walmart, Wynn Resorts, and FedEx, operate from properties owned by Realty Income. Since these tend to be stable, profitable companies, Realty Income rarely struggles to collect rent on the approximately 15,600 properties it owns.

Also, since renting frees up capital for other purposes, such companies benefit by using the company's properties. In fact, with occupancy rates close to 99%, Realty Income remains focused on developing and acquiring additional properties to rent to more tenants. Along with the gradual increase in rental rates, this approach ensures that its revenue continues growing.

2. The generous monthly dividend

Another reason to buy and hold Realty Income is its dividend. True to its nickname as the "monthly dividend company," it has paid a dividend every month since it began payouts in 1994. Moreover, it has increased its dividend at least one time per year since beginning its payout, making it more likely to provide a lifetime of passive income.

That payout amounts to just over $3.25 per share annually, a dividend yield of just over 4.9%. This is well above the S&P 500 average of 1.1%. Also, since it earned $4.26 per share in funds from operations (FFO) income over the trailing 12 months, Realty Income generates enough cash to cover dividend expenses.

More importantly, that return compares well with rates on government bonds, making the payout particularly attractive to income investors. Additionally, they can benefit from the periodic payout hikes and, probably, a rising stock price over the long term. That provides income investors with a compelling incentive to choose Realty Income stock over a fixed income instrument.

3. Continued growth in most business environments

Furthermore, Realty Income stock trades well below its all-time high closing price of nearly $80 per share reached in early 2020. However, since 2022, rising interest rates appeared to dampen enthusiasm for Realty Income stock, and the stock price fell.

Admittedly, a lower interest rate environment would likely help Realty Income buy more properties. Nonetheless, higher rates did not hamper portfolio expansion.

In the first quarter of 2021, the company owned just under 6,700 properties. Over the course of five years, that has grown to almost 15,600 properties. The purchase of VEREIT in late 2021 helped expand it to more than 11,100 locations amid lower rates. Also, higher interest rates did not stop the purchase of Spirit Realty in early 2024, an acquisition that brought the number of properties close to the present number.

The difference investors should note is that the company's stock price has not increased since Realty Income more than doubled the size of its property portfolio. Thus, as more investors realize Realty Income's improving value proposition, it could eventually lead to a stock price recovery.

Making sense of Realty Income's competitive moat

All three of these reasons above not only build a case for owning Realty Income stock but also reinforce the company's competitive moat.

Since many of the world's top companies rent its properties, its property portfolio provides a stable revenue source unlikely to unravel quickly.

Moreover, the 4.9% dividend yield gives income investors an incentive to buy the stock, particularly since they will likely benefit from dividend increases and, over time, a rising stock price. Also, since the company has found ways to acquire more properties in a variety of interest rate environments, investors should feel confident its growth can continue.

All of these factors combine to create a deep competitive moat that will likely continue to grow regardless of the overall economy. Ultimately, that positions Realty Income to provide income investors with steady, growing returns.

Will Healy has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.