Could Buying Realty Income Stock Today Set You Up for Life?

The S&P 500 index (SNPINDEX: ^GSPC) offers a miserly 1.2% yield. Real estate investment trusts (REITs) can get you 3.8%, three times higher. And you can still do better if you buy Realty Income (NYSE: O) and its 5.8% dividend yield today. Here's why even conservative investors will like this high-yield and highly reliable net lease REIT.

What does Realty Income do?

Realty Income is a net lease REIT. That means most of its properties are single-tenant, which leads to a high level of risk on any individual property. But the tenant is responsible for most property-level operating costs, which reduces risk because Realty Income isn't exposed to the expense and work of maintaining the asset. Realty Income also is huge, with more than 15,400 properties. So what property-level risk there is ends up being mitigated by the size and diversification of its portfolio. All in, this REIT has a fairly low-risk business model.

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Nearly 75% of Realty Income's portfolio is in the retail sector. That sounds like a lot of focus, which it is, but the REIT estimates that the retail sector in the U.S. alone is worth $1.5 trillion. Given that Realty Income's market cap is about $47 billion, it only makes up a small piece of that pie. Moreover, net lease retail properties tend to be very similar in nature, so they are fairly easy to buy, sell, and re-lease. This exposure isn't a big risk and any risk that's there is further mitigated by the fact that Realty Income's portfolio is geographically diversified across North America and Europe.

On top of that, the rest of Realty Income's rent roll is spread across industrial assets and a growing collection of unique properties, including vineyards, casinos, and data centers. In fact, the largest risk here might be the fact that Realty Income is nearly four times the size of its next closest competitor. Simply put, it takes a huge amount of investment to move the needle on Realty Income's top and bottom lines. It has a lot of growth levers to pull, given its diversification efforts, but slow and steady is probably the best that investors can hope for from this industry-leading REIT.

Slow and steady Realty Income is very rewarding

Clearly some investors won't find slow and steady to their liking. But a great many should appreciate what is on offer here. As noted above, Realty Income's dividend yield is well above that of the market and the average REIT. So you are being paid very well to own this REIT despite the fact that it is a fairly low-risk investment choice.

But there's more to this story. For starters, Realty Income has an investment grade rated balance sheet, which means that it is financially strong and will likely be able to handle any adversity that comes its way. Second, the REIT has proven that it places a emphasis on returning value to shareholders via regular dividend increases. To put a number on that, Realty Income's dividend has been increased annually for 30 consecutive years. That includes dividend hikes during the coronavirus pandemic and through the Great Recession.

O data by YCharts

If you are looking to set yourself up with a lifetime of income, this is a strong buy option. But some investors might still be worried about that relatively high yield. What's going on there? A big piece of the puzzle is the interest rate environment. The higher rates today do make it harder for Realty Income, and all REITs, to borrow and make profitable investments. However, property markets have always adjusted to interest rates before and will likely do so again this time around, in time. If you can handle that modest near-term uncertainty this is an opportunity to buy a great REIT with a reliable and steadily growing dividend.

Take the setup and start collecting the dividends

The one caveat with Realty Income is that, as noted, slow and steady is the name of the game. During the past three decades the dividend has grown roughly 4.3% a year on an annualized basis. That's not huge, but it is higher than the historical rate of inflation, so the buying power of the dividend has increased over time. All in, Realty Income should be very appealing for investors trying to maximize the income their portfolios generate or if you are looking for a solid cornerstone income investment. Don't let this opportunity slip by without at least looking at Realty Income. If you do take time to inspect this income stock, you'll probably end up buying it.

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