What Would Have to Go Wrong for Realty Income to Cut Its Dividend?

Realty Income (NYSE: O) has declared 673 consecutive monthly dividends without a single cut. The real estate investment trust (REIT) has increased its dividend for 31 consecutive years. We're talking about a period that included the 2008 financial crisis, the 2020 pandemic, and the soaring interest rates during 2022 and 2023.

You could truthfully say that Realty Income offers one of the most dependable monthly dividends on the market today. But what would it take for this REIT to cut its dividend?

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Three apocalyptic scenarios for Realty Income's dividend

We could envision many ways Realty Income could reduce its dividend payout. Maybe aliens from another planet arrive and blow up buildings across the world. However, I think three scenarios don't require such an active imagination.

Like most REITs, Realty Income borrows to fund purchases of new real estate. This makes the company sensitive to interest rates. Should rates skyrocket and remain elevated for a prolonged period, Realty Income could be forced to refinance some of its debt at a much higher cost than in the past. If interest expense increased too much, the company could have to cut its dividend.

Speaking of borrowing, it's possible that Realty Income's management team could take on too much debt. Even if interest rates don't soar, credit rating agencies could downgrade the REIT's credit rating if its balance sheet becomes too debt-heavy. An especially dire scenario would be a downgrade of Realty Income's credit rating to below investment grade. The company wouldn't be able to access capital easily and might have to resort to asset sales and dividend cuts to raise money.

The third scenario in which Realty Income must cut its dividend is when multiple major tenants go bankrupt around the same time. The company's top 20 tenants generate over one-third of its total annual rent. A wave of bankruptcies in this group could easily jeopardize the REIT's ability to pay its dividend at the current level.

Realty reality check

While these three scenarios are possible (and certainly more likely than an alien invasion from outer space), none is probable.

I seriously doubt that Realty Income's management team would take steps that would threaten the REIT's solid A3/A- (reflecting a low risk of default) credit ratings. I'd be shocked if several of the company's top tenants, including Dollar General (NYSE: DG), 7-Eleven (OTC: SVNDY), and Wynn Resorts (NASDAQ: WYNN), went bankrupt simultaneously.

Sure, interest rates could rise and stay elevated for longer than investors would prefer. But Realty Income has survived high-rate environments in the past.

Realty Income could conceivably have to cut its dividend one day. However, a lot would have to change for that to happen. I continue to view this REIT as one of the best high-yield dividend stocks on the market.

Keith Speights has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.