In what comes as a surprise to absolutely nobody who follows the REIT sector, Realty Income (NYSE: announced its 530th consecutive common stock dividend after the bell on August 21, 2014.
This single-tenant triple-net lease REIT also known as 'The Monthly Dividend Company' -- can boast that it has raised its dividend 76 times since listing on the NYSE in 1994.
How Does The Realty Income Dividend Stack Up?
Simple, Yet Elegant Business Model
Realty Income is one of the pioneers of the single-tenant, triple-net lease business model. The company owns over 4,200 properties that are leased out under long-term leases to regional and national chains, as well as other credit worthy tenants.
In addition to monthly rent, these tenants also pay: taxes, insurance and almost all of the maintenance on the buildings.
Diversified Income Stream By Company:
No single tenant accounts for more than about five percent of the portfolio, and the top 20 holdings account for just a little over half of the annual base rent, or ABR.
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Convenience stores, dollar stores and drug stores account for about 30 percent of the income. These are companies that provide basic necessities that consumers require in during both good and difficult economic times.
This Translates Into Historically High Occupancy
Even during the depths of the recession, occupancy levels never fell below the 96.6 percent level which resulted in Realty Income never missing a beat when it comes to paying out dividends to shareholders.
The dividend compounded annual growth rate, or CAGR, for the past 30 years has been an impressive five percent, which includes one of the worst economic slowdowns in recent memory.
The Goose That Lays The Golden Dividend Eggs
AFFO, or adjusted funds from operations, is the engine that drives dividend increases. It is sometimes referred to as funds available for distribution, or cash available for distribution.
Realty Income has been the poster child for steady AFFO growth, which is what is required to support its growing dividends.
A Key Metric To Watch
Any REIT that is increasing dividends without increasing AFFO should immediately raise a red flag for investors. There will likely be some "smoke and mirrors," such as increases in debt levels (borrowing money to pay out dividends) that may signal a dividend cut in the near future.
What Should REIT Investors Pay Attention To On The Balance Sheet?
The Holy Grail for REITs is to achieve an investment grade rating. This allows a REIT to borrow money at lower interest rates to help fund purchases of real estate assets that throw off income that is higher than the REITs overall cost of capital.
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This "spread" basically is how all REITs grow earnings. A REIT that has a high percentage of property level debt (mortgages encumbering the assets) will have a much more difficult time raising funds to purchase properties that are accretive to earnings, and help grow the cash distributed to shareholders.
How Does Realty Income Stack Up?
Actually quite well. The pricing of notes and bonds is determined by a company’s credit ratings. Realty Income has “investment grade corporate credit ratings” (BBB+ from Fitch Ratings Agency, Baa1 from Moody’s Investors Services and BBB from Standard & Poor’s Ratings Group).
How Has Realty Income Performed Versus Its Peer Group This Year?
Top performers year-to-date include: National Retail Properties (NYSE: SRC).
Although American Realty Capital Partners (NASDAQ: ARCP) and W.P. Carey (NYSE: WPC) trail the leaders in total returns, both of these companies are outperforming the S&P 500 YTD. When it comes to dividend yields: ARCP leads the pack at 7.3 percent while W.P. Carey comes in at a respectable 5.2 percent yield.
However, when looking at performance over time, there are 530 reasons why it has been hard to find a more reliable company to invest in than Realty Income.
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