Key insights
- Realty Income (O), a high-yield REIT, has announced its 135th dividend increase, demonstrating a consistent track record of growing passive income for investors. The company's strong AFFO payout ratio and substantial free cash flow position it well for continued dividend growth and expansion into new markets like data centers and Mexico. This stability and growth potential in a key real estate segment could offer a modest positive signal for related equity sectors.
Realty Income's (O +1.31%) mission is to "deliver dependable monthly dividends that increase over time." With the real estate investment trust (REIT) recently declaring its 135th dividend increase since its public market listing in 1994, it's safe to say the company is achieving its mission.
The REIT is in a strong position to continue increasing its monthly dividend, which now yields over 5%. That makes it an excellent option for those desiring to make passive income.
Realty Income is increasing its monthly dividend from $0.2705 per share ($3.246 annualized) to $0.2710 ($3.252 annualized), a modest 0.2% increase. That's its second raise this year already. As the chart below showcases, the REIT has now increased its dividend for 115 consecutive quarters, while growing it at a 4.1% compound annual rate over the last 31 years:
The company can easily afford its rising payout. Realty Income's dividend payout ratio stood at 71.7% of its adjusted funds from operations (AFFO) in the first quarter, a reasonable level for a REIT. That enabled it to produce $245.4 million of free cash flow after paying dividends in the period, or about $981.6 million annualized. That excess free cash flow provides the REIT with funding for new income-generating real estate investments.
Realty Income is in a strong position to continue growing its real estate portfolio and dividend. The REIT estimates its total addressable market for investing in net-leased real estate across the U.S. and Europe is $14 trillion. It has been steadily expanding its opportunity set by adding new investment verticals. For example, it entered the $500 billion U.S. data center market in 2023 through its up to $800 million build-to-suit joint venture with leading data center REIT Digital Realty. Realty Income has also steadily expanded into new international markets, including making its first investment in Mexico earlier this year.
The company typically sources more opportunities than it can fund. For example, last year it sourced $120.5 billion in investment opportunities but closed only $6.2 billion in new investments, or about 5% of its sourced volume. That has led it to build a private capital management platform. It launched the U.S. Core Plus Fund, which generates fee-based income for the REIT, boosting its returns and ability to make new investments. It also formed joint ventures with Apollo and GIC that provide it with additional growth capital. This strategy positions it to deliver higher AFFO per-share growth going forward, supporting dividend growth.
Realty Income continues to successfully execute its mission of paying a steadily rising monthly dividend. The REIT is in a strong position to continue growing its high-yielding payout, given its solid financial profile, robust investment opportunities, and expanding private capital platform. These features make it an ideal income stock to buy and hold for the long term.