3 Reasons to Buy Realty Income Stock Like There's No Tomorrow

The real estate investment trust (REIT) Realty Income (NYSE: O) may not beat the broader market in terms of stock price appreciation, but that doesn't mean it's not a great stock to own. The company is known for its ability to generate passive income for shareholders through a hearty dividend.

REITs by their very nature receive special tax status, as long as they pay out at least 90% of their taxable income to shareholders, along with other requirements. Here are three reasons to buy Realty Income like there's no tomorrow.

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1. A high-yielding dividend

Although REITs have to pay out most of their earnings through dividends, some REITs pay higher dividends than others. Realty Income's dividend yield is roughly 5.75%, which compares favorably to the broader sector. According to data compiled by S&P Global this year, the average one-year dividend yield of publicly traded U.S. equity REITs was 3.91%.

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While that's nothing to sniff at, keep in mind that the U.S. economy has been in a high-interest-rate environment for the last couple of years, where Treasury yields exceeded 5%. As of May 31, the yield on the U.S. 10-year Treasury bill was nearly 4.4%, which means investors could get higher yields from super-safe U.S. Treasury yields over REITs. This gives Realty an advantage since its dividend yield is significantly higher.

2. The dividend looks safe

Sometimes, a high dividend yield can indicate that a company may be struggling. But Realty Income's dividend looks safe. The company refers to itself as "The Monthly Dividend Company," and for good reason.

Realty Income, which pays a monthly dividend, has paid 658 consecutive monthly dividends and increased its dividend for 110 consecutive quarters, meaning the company has increased its dividend for three decades. Throughout this period, Realty Income has grown its dividend at a compound annual growth rate of 4.3%.

Another way to evaluate a REIT's dividend is by looking at adjusted funds from operations (AFFO) and how much of AFFO the dividend consumes. AFFO is typically defined as net income to common stockholders plus depreciation and amortization of real estate assets, and impairments of depreciable real estate assets, all subtracted by gain on property sales. The adjustments remove nonrecurring items each quarter. AFFO is essentially free cash flow for a REIT. In 2024, Realty Income only distributed about 75% of AFFO to shareholders, which provides a good margin of safety.

3. Realty Income runs a solid business

Looking at the operations that fuel earnings and distributions, Realty Income runs a solid business with a portfolio of 15,600 properties in all 50 states of the U.S., the United Kingdom, and several countries in Europe. The company is what's considered a triple net lease operator. It rents out almost all of its properties, but in addition to rent, the tenants cover costs associated with maintenance, insurance, and property taxes.

For landlords, the arrangement is a no-brainer because it's less work and costs on their side. However, for taking on the associated burdens, tenants may be able to negotiate longer leases or lower rents. They also have more flexibility when arranging a space, which is helpful for businesses.

Realty Income's strategy involves focusing on businesses that are nondiscretionary, have lower price points, and are more service-oriented. Some of the larger sectors they lease to are convenience stores, grocery stores, dollar stores, home improvement stores, and quick-service restaurants. Some of their larger clients include 7-Eleven, Dollar General, and Walgreens.

Realty Income has also started to wade into new growth sectors and geographies that could power the company's future expansion such as U.S. data centers and gaming, which the company believes has a $900 billion total addressable market (TAM). Realty would also like to grow in Europe, where it believes there is an $8.5 trillion TAM.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income and S&P Global. The Motley Fool has a disclosure policy.