My Top Dividend Stock to Buy in August (and It's Not Even Close)

The calendar turning to August means many things for people. As the hot and humid weather rolls in, people often use this time for relaxation and vacations.

Between leisure activities, it's also a good time to review your investments, since many companies have recently reported quarterly results. For those interested primarily in dividends, there's one stock that stands head and shoulders above the others.

Here's why Realty Income (NYSE: O) has earned its place as my top dividend stock to purchase.

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Structure favors dividends

Realty Income is structured as a real estate investment trust (REIT). REITs own, operate, or finance real estate.

It's an ideal investment for dividend-seeking investors. That's because REITs must pay out at least 90% of their pretax income as dividends.

But Realty Income stands out among REITs. It primarily owns retail properties, receiving over 78% of its rent from the sector. While many investors feared that online shopping would eliminate the need for physical stores, those fears have been overblown. Besides, management focuses on tenants with strong omnichannel presences and those whose shoppers prefer the in-person experience.

These include grocery and convenience stores, home-improvement stores, dollar stores, automotive service stores, drug stores, restaurants, and wholesale clubs.

Prioritizing dividend growth

Realty Income has long been successful, having existed since 1969. And it has a long history of raising dividends.

The REIT, which pays dividends monthly, typically raises the payout quarterly. Most recently, in June, the board of directors nudged the monthly rate up from $0.2705 to $0.271. Realty Income has instituted 115 straight quarters of dividend increases.

The company can afford the payouts, too. Its second-quarter adjusted funds from operations (AFFO) grew 2% year over year to $1.09 a share. Management also upped this year's AFFO per share expectation to $4.44-$4.45.

That's an important measure for REITs since it's cash available for distribution. On this basis, Realty Income will easily cover the new annualized dividend of $3.25.

Above-average dividend yield

Based on the new rate, Realty Income's stock has a 5.1% dividend yield. That's five times the S&P 500 index's 1% yield.

Even more impressive, Realty Income's shares have a higher dividend yield than the average equity REIT. The FTSE Nareit All Equity REITs had a 3.6% yield at the end of July.

For dividend investors, a long track record of increasing payouts, the ability to easily afford current payments, and an above-average dividend yield presently make Realty Income my top dividend stock.

Lawrence Rothman, CFA 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.