Real estate is an investment vehicle that has struck many millionaires and billionaires throughout history. This is especially true for real estate leased to businesses (i.e. commercial real estate).
But commercial real estate was largely a playground for the ultra-rich. That is to say until the law which made real estate investment trusts (REITs) in the 1960s. Now investors with just a few dollars in their brokerage account can become owners with the click of a buy button.
Few, if any, REITs are as well known to investors as Real estate income (O -0.54%). Here’s why the stock is among the largest holdings (REIT and non-REIT) in my primarily dividend-paying stock portfolio.
A dominant company with decades of growth remaining
Realty Income has a portfolio of over 11,700 properties in the United States and Europe. The company’s $41 billion market capitalization positions it as the seventh largest REIT on the planet.
As a triple-net lease REIT, Realty Income buys properties and leases them to tenants through sale-leaseback transactions. The company’s tenants generally use these funds to develop their activities and/or pay off their debts. Realty Income’s leases with tenants are typically around 10 to 11 years in length and include annual lease escalations, which provide the company with reliable and growing rental income. This explains how the company was able to deliver 5.1% adjusted annual growth operating funds (AFFO) growth per share since 1996.
And as big as Realty Income has become over the past 50+ years, the company’s growth appears to be just beginning. Indeed, the total addressable market for commercial real estate in the United States and Europe totals $13 trillion. Realty Income can continue to be selective with a less than 10% acquisition rate of the investment opportunities it generates and has ample room for future growth.
Image source: Getty Images.
The market-crushing dividend is safe
Realty Income’s 4.5% dividend yield is nearly triple the S&P500 return of 1.7% of the index. Although the company’s dividend growth is not very high, it offers a good mix of safe starting income and future income.
This is supported by the fact that the dividend distribution rate will be 76% in 2022. This leaves Realty Income with sufficient capital to make future real estate acquisitions. Such a manageable payout ratio also creates a margin of safety in the dividend in the event of a temporary drop in AFFO per share. This is why I am convinced that Realty Income build on its 28-year dividend growth streak in the future.
A great company at a fair price
With the S&P 500 index down 19% in 2022, the past year has been a trying one for the stock market. But property income fell only 7% in 2022.
Investors looking for stable performance in uncertain times would be well placed to consider buying property income now. The stock trades at a price-to-AFFO per share ratio of just 16.9. And if that weren’t enough, Realty Income’s 12-month (TTM) dividend yield of 4.5% is in line with the median 10-year TTM dividend yield of 4.5%. These aren’t unreasonable valuations for a company that has nearly three full decades of dividend growth under its belt.
Kody Kester has positions in property income. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.