Most dividend stocks pay their investors on a quarterly dividend schedule. But there are companies that pay their shareholders each month. Monthly dividend stocks provide shareholders with dividend payments once a month, instead of every three months. This gives investors the benefit of even faster compounding than quarterly dividends.
Realty Income (O) is a monthly dividend stock, which trademarked itself as the "The Monthly Dividend Company." Realty Income has paid a dividend to shareholders each month for more than 48 years running. Even better, the stock has a high dividend yield of 4.3%, more than double the average dividend yield in the S&P 500.
Realty Income's remarkable stability and consistent dividend payouts allow shareholders to sleep well at night. Investors can collect a high yield and a secure dividend payout from Realty Income, the best monthly dividend stock.
Focused Real Estate Strategy
Realty Income is a Real Estate Investment Trust, otherwise known as a REIT, and operates in commercial real estate. Realty Income owns more than 5,600 properties, which are leased to a variety of tenants spanning nearly 50 different industry groups. Realty Income's portfolio includes dollar stores, pharmacies, movie theatres, and more. It has an excellent list of high-quality tenants, some of which include FedEx, Walmart, and AMC. The vast majority of the REIT's tenants are industry-leading companies with high profitability. Over half of Realty Income's annual revenue is derived from tenants with investment-grade credit ratings.
In addition, Realty Income utilizes the "triple-net" structure, which is advantageous for the REIT. Under this structure, tenants are responsible for the operating expenses of the property, including taxes, maintenance, and insurance, in addition to monthly rent payments. This lease structure reduces Realty Income's exposure to rising property operating expenses, while providing the company with a steady and predictable stream of cash flow, which it can use to pay dividends to shareholders.
This is reflected in the strong metrics for Realty Income's portfolio, including high occupancy. Realty Income announced its third-quarter earnings report on Oct. 31. Total revenue of $338 million for the quarter increased 10% from the same quarter a year ago. The revenue increase was primarily driven by the acquisition of new properties. Realty Income acquired $610 million worth of new properties during the third quarter alone. Realty Income's funds from operation, or FFO, increased 5% for the quarter. Funds from operation is a better metric to use when analyzing REITs than traditional GAAP earnings-per-share, since certain non-cash charges like depreciation are meaningful items for REITs.
Realty Income raised its guidance for 2018 FFO to $3.18-$3.21 per share, which would mean approximately 5% growth at the midpoint of guidance. This shows that 2018 will have amounted to another year of strong and steady growth for Realty Income. The REIT should continue to generate FFO growth in 2019 and beyond, which bodes well for shareholders.
Realty Income will continue to acquire new properties to generate growth. In addition, the company can raise rents on a regular basis to increase cash flow. Realty Income focuses on long-term leases (usually 10 to 20 years), with contractual built-in rent increases.
Realty Income has an amazing history of steady dividend payments to shareholders. The REIT has paid 582 consecutive monthly dividends. It has also raised its dividend 99 times since its initial public offering in 1994. Since the IPO, the company has delivered annualized dividend growth of 5%, while consistently providing a high yield.
Furthermore, the REIT structure is advantageous for investors. It is common to find high yields across the REIT asset class, since REITs are required to distribute at least 90% of their taxable income to shareholders each year. By doing so, REITs typically do not pay taxes at the corporate level. This results in a win-win for the company and its shareholders.
Realty Income also helps protect shareholders by maintaining a conservative capital allocation. The company has a strong balance sheet, particularly for a REIT which will typically utilize leverage to finance property acquisitions. Realty Income has a credit rating of A3 from Moody's and A- from Standard & Poor's, the two major U.S. credit ratings agencies. These are very high credit ratings for a REIT, which allow Realty Income to keep its cost of capital low, leaving more cash flow available for shareholder dividends.
At the current valuation, Realty Income stock appears to be fairly valued, but can still generate satisfactory returns through growth and dividends. Assuming 5% annual FFO growth, in addition to the 4.3% dividend yield, Realty Income stock could provide nearly 10% annualized returns going forward. This is a strong expected return for an established, industry-leading company with a relatively low risk profile.
Results Speak for Themselves
Realty Income is a case study for the excellent returns that can be generated from a strong business combined with a shareholder-friendly management team. According to the company's investor relations department, Realty Income has delivered total returns of 16% per year since its initial public offering. Realty Income is a strong stock pick for income investors looking for a high-yield stock with a safe and growing dividend.
(This article was originally sent Jan. 4 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Peter Tchir, Chris Versace and others.)