Where Will Realty Income Be in 10 Years?

Realty Income (NYSE: O) has a market cap of around $60 billion. It owns over 15,500 properties spread across the United States and Europe. It is, by far, the largest net lease real estate investment trust (REIT) you can buy. Here's why that's a good thing and what it likely means for the next decade.

What does Realty Income do?

Realty Income's tenants pay for most of the property-level costs associated with the assets they occupy. That is known as a net lease, which materially reduces business risk for Realty Income. In the end, many of the transactions the company enters into turn out to be financing events for the seller, who usually becomes the property's tenant in a sale-leaseback transaction.

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Effectively, the seller raises cash for growth, or other things, without having to tap the capital markets. But because of the net lease structure, the seller still retains effective control of the property. Real estate investment trusts like Realty Income get committed tenants, long leases, and regular rent increases. It's pretty close to a win/win deal.

Bigger is increasingly better in the REIT sector

In a sale/leaseback transaction, one of the most important factors for the seller is certainty. The seller wants to know that the buyer can afford the deal and that the deal can be completed quickly and efficiently. Given Realty Income's size and strong operating history, it has no problem competing on these factors. However, it also has the benefit of advantaged access to capital markets thanks to its size and financial strength (it is investment grade rated).

These positive attributes aren't likely to change over the next 10 years. In fact, Realty Income's advantages are more likely to increase over time than decrease, as it continues to gain scale. That's actually the trend in other REIT sectors as well, highlighting the dominance of $125 billion market-cap Prologis (NYSE: PLD) in the warehouse niche. This has important implications for dividend investors.

30 is likely to turn into 40

Right now, Realty Income is offering an attractive 5% dividend yield backed by 31 consecutive annual dividend increases. While the yield will vary from day to day, given the size and strength of Realty Income's business and management's conservative nature, in a decade the company is likely to be reporting it has hit 41 annual dividend increases.

If you are looking for a reliable dividend stock, net lease giant Realty Income could be a foundational investment for the next 10 years and beyond.

Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Prologis and Realty Income. The Motley Fool has a disclosure policy.