Is Realty Income Stock a Long-Term Buy?

Realty Income (NYSE: O) is one of the market's hottest dividend stocks. After several frustrating years that had investors pulling their hair out, Realty Income has exploded, racing to double-digit returns since the start of the year.

But it's difficult to forgive and forget when stocks underperform for such long stretches. It's fair to wonder whether Realty Income's recent success is the selling opportunity some may have been waiting for, or if the stock is genuinely beginning a new chapter in a success story that dates back to the mid-1990s.

Here is why Realty Income is a long-term buy.

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One of the top REITs in the game

Realty Income is one of the world's leading real estate investment trusts, or REITs for short. These companies acquire and lease real estate, a unique business structure that requires them to pay at least 90% of their taxable income to shareholders as qualified dividends. Realty Income specializes in consumer-facing commercial properties, such as restaurants and retail stores.

The company built its reputation on its monthly dividend schedule, even referring to itself as The Monthly Dividend Company. The stock yields 4.9%, and management has raised the dividend for more than 31 consecutive years.

Call it a comeback

Realty Income had to deal with two serious problems back to back, beginning with the pandemic. COVID-19 hit Realty Income's stock hard. Tenants struggled to make rent as lockdowns froze businesses and kept consumers isolated in their homes. Thanks to the high tenant quality Realty Income enjoys, the company still received enough rental income to sustain and raise the dividend throughout the pandemic.

O FFO Per Share (TTM) data by YCharts

Then inflation surged just after the pandemic ended. The Federal Reserve aggressively hiked interest rates in response to inflation. High rates make borrowing expensive, and debt is one of the primary levers REITs pull to fund growth since they must pay out almost all their taxable income to shareholders. Realty Income seems to have adjusted to the new market environment. You can see above that per-share growth has begun ticking up again over the past year.

Why Realty Income is still a long-term buy

The dividend is the foundation for the stock's success, and fortunately, that's never faltered. And if it could survive the pandemic, investors should feel confident about what may come. Given its healthy 76% payout ratio and the company's strong A- credit rating, the dividend looks as safe as they come.

Looking ahead, Realty Income has expanded beyond its core retail model into new industries and countries. It acquired properties in casino gaming and data centers, and has built a footprint in Europe.

The stock still trades at a reasonable valuation of 15 to 16 times funds from operations (earnings for a REIT), so there's room for upside as Realty Income continues to grow. Investors who reinvest the monthly dividend can add another boost to compounding, which could pay off handsomely over a decade or two.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.