Dividend Growth Stock Overview: Realty Income Corporation

Rent from Walgreens Stores provided more than 5% of Realty Income's
revenue in 2014.
Photo courtesy Mike Mozart/flickr.com.

About Realty Income

Realty Income Corporation is a real estate investment trust (REIT) that specializes in retail and commercial properties. The company was founded in 1969 and was listed on the NYSE in 1994. Since then, Realty Income – which bills itself as “The Monthly Dividend Company” – has paid dividends every month and increased them no less than 81 times.

At the end of 2014, the company owned over 4,300 properties, consisting of over 70 million square feet of retail space. The properties are leased to over 230 different commercial tenants across 47 industries, and are located in 49 of the 50 states and Puerto Rico.

Realty Income generally invests in freestanding, commercially zoned, single tenant properties. Of the company’s current investments, all but 19 are single tenant properties. The company’s tenants are diversified, with the largest contributor – Walgreens Stores – providing 5.4% of 2014 revenue. Overall, drug stores provided 9.5% of 2014 rental revenue; the highest-contributing category was convenience stores, which provided 10.1% of 2014 revenue. The next largest category was dollar stores (950 Family Dollar and Dollar General stores), which – like the drug store category – contributed 9.5% of 2014 rental revenues. The average annualized rental revenue is about $13 per square foot.

To support the continually rising dividends, Realty Income is constantly acquiring new properties. In 2014, the company spent $1.4 billion to purchase and develop over 500 properties located across 42 states. Rental revenue from these new properties will be split between retail (85% of rents), industrial and distribution (6.6%), office space (6.4%) and manufacturing (1.3%).

In order to finance new investments, Realty Income uses a $1.5 billion unsecured credit line, at an interest rate of LIBOR + 1.25%. Over time, the company will convert to longer term and/or more permanent sources of financing, which may include issuing common stock or additional debt. In April 2014, the company issued 13.8 million shares of stock, which netted it nearly $530 million, and in June and September 2014, the company issued a total of $600 million in debt, which it used to pay back the unsecured credit line.

Full year 2014 funds from operations (FFO) were $562.9 million, up 21.8% from 2013. FFO per share was up 7.1% to $2.58; using the current annualized dividend of $2.28, the payout ratio is 88.4%. Note that a portion (generally 20 – 35%) of the dividend is classified as return of capital; this will impact the amount of federal taxes you pay and reduces your cost basis in Realty Income stock which will increase your capital gains when you sell your stock.

The company is a member of the S&P 500 index and S&P’s High Yield Dividend Aristocrats index, and trades under the ticker symbol O.

As a member of the S&P 500 index, Standard & Poor’s should designate Realty Income as an S&P 500 Dividend Aristocrat once the company has raised dividends for 25 consecutive years. I believe that Realty Income will continue to raise dividends going forward, which means that it should become an S&P Dividend Aristocrat at the beginning of 2021.

Realty Income’s Dividend and Stock Split History

Realty Income Dividend Growth

Realty Income has increased its dividends 81 times since coming public in late 1994.

As mentioned above, Realty Income identifies itself as “The Monthly Dividend Company”. The company states that its primary objective is to “generate dependable monthly cash dividends”. Realty Income has done just that since its founding in 1969. The company generally increases dividends 4 – 5 times a year, but not on a regular schedule. Realty Income just recently announced a small dividend increase to an annualized rate of $2.28. Based on historical precedence, I believe that the company will next increase its dividend in September.

With the exception of a 21% year-over-year dividend increase from 2012 to 2013, Realty Income has generally increased dividends in the low to mid-single digit percentages. The company’s 5-year compounded annual dividend growth rate (CADGR) is 5.13%, and the company’s 10-year CADGR is 5.85%.

With regards to stock splits, Realty Income split its stock only once – a 2-for-1 split in December 2004.

Over the 5 years ending on December 31, 2014, Realty Income stock appreciated at an annualized rate of 18.79%, from a split-adjusted $19.79 to $46.81. This outperformed the 13.0% annualized return of the S&P 500 over this time.

Realty Income’s Direct Purchase and Dividend Reinvestment Plans

Realty Income Corporation established direct purchase and dividend reinvestment plans in March 2011. You do not need to be a current shareholder to participate in the plans. If you aren’t a current shareholder you must invest a minimum of $1,500, either in a single purchase or in 15 monthly purchases of at least $100. The plan allows for full and partial reinvestment of your dividends.

Aside from the high initial investment that’s required, the plans are favorable for participants. The only fee on purchases is a $5 set up fee for people who don’t currently participate in any dividend reinvestment plans administered by Wells Fargo. Realty Income covers all other fees on stock purchases.

When you sell the shares in your plan, you’ll pay a transaction fee of between $15 and $30 (depending on the type of sell order), and a commission of 12 cents per share. There’s also a $5 fee to have the sale proceeds electronically deposited to your account.

Helpful Links

Realty Income’s Investor Relations Website

Current quote and financial summary for Realty Income (finviz.com)

Information on the direct purchase and dividend reinvestment plans for Realty Income


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