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Realty Income: Another BORING and Solid Quarter for the Monthly Dividend Company

July 24, 2014 | About:

It was another solid quarter for Realty Income (O)—one of my very favorite long-term dividend machines.

Revenues jumped 22.6% on the back of new property investments and a 1.4% increase in same-store rents. During the quarter, Realty Income raised $528 million in a secondary share offering and ploughed $405 million of it into new properties and development projects while managing to modestly increase its occupancy rate from 98.2% to 98.3%. The new properties have a weighted average lease maturity of 10.6 years and a lease yield of 7.3%, meaning that these should be nice income generators for a long time to come.

Funds from operations (FFO)—the most common metric of profitability for REITs—increased 21.1% and 6.7% per share. For the uninitiated, FFO is a measure of net income that adds back non-cash charges like depreciation and backs out gains on the sale of properties. The idea is to give a more accurate measure of real operating performance and of the cold, hard cash being generated for the payment of dividends.

And speaking of dividends, Realty Income increased its monthly dividend in June for the 76th time in its history and for the 67th consecutive quarter (see “5 Monthly Dividend Stocks”). Since going public in 1994, Realty Income has churned out 527 dividend checks, making it one of the most dependable income payers to ever be traded publically.

This gets to the crux of why I love Realty Income and why I consider it far better than a bond for your retirement income needs. Right now, Realty Income pays an annualized dividend of $2.19. Ten years ago, it paid an annualized dividend of $1.22. So, if you had retired in 2004, using your Realty Income dividends to pay your bills, you would have seen your income rise by fully 80%, far outpacing inflation. And this says nothing at all about capital gains, which were substantial.

Had you instead purchased a 10-year bond, your income would not have changed; the coupon payment you received in 2014 would be the same as the first one you received in 2004. And looking at current bond yields, your income would actually fall significantly if you were to reinvest the proceeds in today’s market.

Rather than think of Realty Income as a stock, I prefer to think of it as a perpetual bond with a rising, inflation-beating payout. Yes, it is “riskier” than your average corporate bond in that its stock price is more prone to fluctuation than that of a bond. As a case in point, O stock lost a third of its value during last year’s “taper tantrum.”

But if you’re buying it as an income generator, price fluctuations really don’t matter—so long as the business remains strong and the dividend remains intact. And on that count, Realty Income passes the test with flying colors. Its portfolio is full of high-quality, recession-resistant properties; its “typical” property is a pharmacy run by Walgreens (WAG) or CVS Caremark (CVS).

Realty Income continued to pay and raise its dividend throughout the crisis years—and in my book, that qualifies O stock as a viable income substitute for bonds.

The question simply becomes one of price. Realty Income currently yields 4.9%. In a world in which the 10-year Treasury yields 2.5%, that’s attractive. I would consider Realty Income a buy at a yield of 4.5% or higher.

If you are still years away from retirement, consider instructing your broker to automatically reinvest the monthly dividends. I personally own shares, and that is exactly what I do. I hope to leave these shares to my children decades from now, and if they are smart they will hold on to them and pass them on to their own children.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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