Is Realty Income a Millionaire-Maker Stock?

It can be tempting to bet on flashy growth stocks that promise quick returns. But betting on stable, well-established companies is also a great way to build wealth in the stock market -- while sleeping easier at night. Let's explore the pros and cons of Realty Income (NYSE: O) to decide if it has a place in your long-term investment portfolio.

Unlocking the value of real estate

Image source: Getty Images.

Real estate is one of the greatest wealth creators in the world. After all, the world isn't generating any new land. And restaurants, offices, and hospitals all need a place to conduct business. Real estate investment trusts (REITs) were created to give regular investors access to this industry while minimizing its traditional downsides, like illiquidity.

These companies are given substantial tax advantages, but they are required to pay most of their income to investors in the form of dividends.

With its market cap of $49 billion, Realty Income is the eighth-largest REIT in the world. And it focuses on commercial properties across North America and several European countries. The company's size gives it some advantages, like easier access to credit. Its portfolio is also very defensively oriented, with top weightings going to recession-resistant industries like grocery stores, dollar stores, and gas stations.

As of Sept. 30, Realty Income controls 15,457 properties and serves 1,552 clients across 90 industries. And the portfolio boasts an occupancy rate of 98.7%, which means a consistent flow of dependable income.

Is size always better?

While Realty Income's size is one of its biggest advantages, this also poses a challenge. The larger a portfolio gets, the harder it becomes to generate continued growth, especially while maintaining portfolio quality. However, management has a plan to address these concerns.

In late 2023, Realty Income completed its biggest acquisition yet by merging with another publicly traded REIT, Spirit Capital. Both companies had a focus on commercial real estate, and the $9.3 billion deal was designed to help the combined entity unlock efficiencies.

Realty Income is also targeting overseas expansion through its increasing presence in Europe -- particularly the U.K., which already represents 12% of its real estate portfolio. In the third quarter, the company added 15 additional properties in Europe (18% of acquisitions). However, these assets tended to be more expensive, representing around 55% of the $594 million the company spent on acquisitions during the period.

Over the long term, investors should expect Realty Income to expand its presence in continental Europe, where its size and experience could help it find good deals in sectors like hospitality and retail.

Is Realty Income stock a buy?

Despite its industry leadership, Realty Income's shares have fallen around 26% (not including dividend payments) over the last five years. This may have a lot to do with macroeconomic challenges like high Federal Reserve interest rates, which can increase the cost of debt and equity financing while making dividend stocks less attractive relative to alternatives.

That being said, inflation seems to be fading, and these high rates probably won't last forever, so now is a great time to bet on Realty Income while shares are still relatively cheap.

The company's dividend yield of 5.63% trounces the S&P 500 index average of just 1.32%. It has a long track record of dividend sustainability, having increased its payout every single year for 26 years in a row. The icing on the cake is that the annual payment is broken up monthly, leading to a satisfying flow of income that can be quickly reinvested. The stock has millionaire-maker potential for investors willing to buy and hold for multiple decades.

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Will Ebiefung has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.