Is Realty Income's 5.6% Dividend Yield Too Good to Pass Up?

For investors of Realty Income (NYSE: O), the number 666 is significant. It's the number of consecutive monthly dividends that this income machine will have paid out when they collect their next check this week.

For decades, Realty Income couldn't be stopped. Since 1994, it has grown revenue from $49 million to $5.27 billion in 2024, a 10,657% increase. While the company frequently raises its payouts by only a fraction of a cent; it often hikes the dividend multiple times each year, so the increases add up. Realty Income has delivered an average annual return of 13.7% since 1994, which amounts to a 5,253% gain. Not bad for a company that started out with a single Taco Bell property!

But the company's making big changes. Its foray into European real estate markets now accounts for 72% of its investment volume, and late last year, it launched a private capital fund. Wall Street hasn't cheered these moves over the last year, with shares returning just 4.7% compared to the S&P 500's 12.8% rise.

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Today, the stock offers a 5.6% dividend. While it hiked its payout in 2025 as usual, the yield is mostly a function of shares being stuck in neutral over the last 12 months.

Is Realty Income reinventing itself to emerge bigger and stronger? Or is this a classic case of "If it ain't broke, don't fix it"?

Cracking the European market

Until recently, Realty Income's empire was almost entirely domestic. It made its first-ever international acquisition in 2019, when it bought 12 U.K. properties leased to the grocer Sainsbury's.

As of last quarter, 17.7% of its contractual rent properties are in Europe or the U.K. Last quarter, the company spent $1 billion ramping up its European portfolio. That's up from the $889 million and $893 million it spent on European properties in Q2 and Q1, respectively.

Here's why this is a big deal: The European properties are already proving more lucrative than those in the U.S., with an initial weighted average cash yield of 8%, compared to the 7% that new U.S. properties are posting.

You can see why, according to CEO Sumit Roy in Q3's earnings call, "the European investment opportunity continues to screen more favorably on a risk-adjusted basis relative to the U.S." Even so, the company spent $380 million on U.S. properties last quarter. The company is highly selective in which properties it pursues, with a selectivity ratio of 4.4%, meaning that out of $31 billion worth of properties screened and assessed, Realty Income went ahead with just $1.4 billion worth of them.

Will it always be so selective? That's about to be tested as Realty Income's other major project comes to fruition.

Unlocking $2 billion in dry powder

Maybe the Federal Reserve will lower interest rates again in 2026. Maybe it won't.

Realty Income isn't waiting to find out. In Q3, according to Roy, the company missed out on deploying $2 billion toward investments it would have liked to make because the costs of capital were too high. That's where its newly launched fund comes in.

Called the Realty Income U.S. Core Fund, this open-end private capital vehicle is seeded with $1.4 billion worth of industrial and retail properties that Realty Income transferred from its balance sheet. The fund partners with institutional investors to acquire and manage U.S. net lease investments and, ultimately, generate dependable income. It will also support ongoing growth and liquidity initiatives.

So, is Realty Income's 5.6% dividend yield safe?

Yields approaching 6% can sometimes signal value traps, or investments that temporarily offer high yields because a dying company's share price has already plummeted.

That's not the case with Realty Income. The company's price-to-earnings ratio of 55 indicates that this is no value trap. Rather, it's a company that trades at a premium because it's just grown earnings by 17.2% and revenue by 10.3% while making savvy investments in a promising frontier.

In the meantime, Realty Income will get even more breathing room from the Fed's decision last week to lower rates by 25 basis points. It's already anticipating refinancing a $1.1 billion multi-currency loan at a more favorable rate, and as Treasury yields fall, its 5.6% dividend yield will attract still more investors. For investors craving reliable and growing income, this stock is a buy.

William Dahl 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.