Realty Income Corp: Delivering 3 Consecutive Dividend Hikes Despite the Pandemic
Consistent Dividend Growth…from a Retail Landlord?
Commercial real estate, particularly retail real estate, has been hit hard by the COVID-19 pandemic.
First there were lockdowns, so non-essential retailers had no choice but to close their doors. Then, even though lockdowns have been lifted in most regions, customer traffic simply hasn’t been the same as before. When retailers are doing badly, they may not have the money to pay their landlords.
Looking around, rent collection figures have generally been quite dismal at real estate investment trusts (REITs) that focus on retail properties.
And when retail REITs can’t collect enough rent, they won’t have the ability to pay the same dividends to their shareholders as before. Indeed, dividend cuts are not uncommon these days.
Yet one retail-focused REIT has managed to not just maintain its payout, but actually increase it. As a matter of fact, it has done so three times already since the COVID-19 outbreak.
I’m talking about Realty Income Corp (NYSE:O).
Headquartered in San Diego, CA, Realty Income has a portfolio of more than 6,500 commercial real estate properties that are subject to long-term net lease agreements. These properties are spread across 49 U.S. states, Puerto Rico, and the U.K. (Source: “Third Quarter 2020 Institutional Investor Presentation,” Realty Income Corp, last accessed December 4, 2020.)
The REIT generates about 85% of its rent from retail properties, which could be a source of concern because of the ongoing downturn in the retail industry. However, Realty Income has a very high-quality tenant base.
Its top tenants by rental revenue include well-known companies like Walgreens Boots Alliance Inc (NASDAQ:WBA), Dollar General Corp. (NYSE:DG), Walmart Inc (NYSE:WMT), and FedEx Corporation (NYSE:FDX). In fact, the company earns nearly half of its rent from investment-grade-rated tenants.
To see just how high-quality these tenants are, here’s a number: 93.1. That’s the percentage of contractual rent the REIT managed to collect from its entire portfolio—which includes beaten-down businesses like theaters and restaurants—in the third quarter of 2020. Notably, the contractual rent collection from investment-grade tenants was 100% for the quarter.
Still, what really sets O stock apart—not just from its REIT peers, but from almost every other stock on the market—is the frequency of its payout increases.
Realty Income pays monthly dividends. On March 17, just as the COVID-19 pandemic started in the U.S., the company’s board of directors declared an increase in the monthly dividend from $0.2325 to $0.233 per share. (Source: “Dividend Payment Information,” Realty Income Corp, last accessed December 4, 2020.)
On June 9, when lockdowns were still in place in many regions, the REIT announced a further increase in its monthly dividend rate to $0.2335 per share.
Then, on September 17, Realty Income’s board decided to reward shareholders with another dividend hike. This time, the monthly dividend rate was raised to $0.2340 per share.
Like I said, this performance is impressive, and not just by REIT standards. Even industries that are known to be recession-proof, such as consumer staples, don’t offer payout increases as often as this.
In fact, Realty Income Corp is continuing a track record of giving shareholders a “pay raise” every three months: the latest dividend hike was the company’s 92nd consecutive quarterly increase. Most other dividend growth stocks, on the other hand, tend to only increase their payouts on an annual basis.
Realty Income’s dividend has remained safe, even after all those raises. In the third quarter of 2020, the REIT generated adjusted funds from operations (AFFO) of $0.81 per share, which was just two cents less than what it earned in the year-ago period. Considering that the company paid three monthly dividends totaling $0.701 for the quarter, its AFFO covered the payout with ease. (Source: “Realty Income Announces Operating Results for Third Quarter and First Nine Months of 2020,” Realty Income Corp, November 2, 2020.)
In the first nine months of 2020, Realty Income’s AFFO came in at $2.55 per share, which actually marked a 3.7% increase year-over-year. Again, since the REIT paid investors $2.092 per share in dividends during this period, its AFFO provided more-than-sufficient coverage for the payout.
Bottom Line on Realty Income Corp
Realty Income stock is well positioned to keep rewarding shareholders.
At the end of September, Realty Income Corp’s property portfolio was 98.6% leased, with a weighted average remaining lease term of approximately nine years. The REIT has a high-quality tenant base, and with effective COVID-19 vaccines being announced and an economic recovery underway, I wouldn’t be surprised to see further improvements in the company’s rent collection figures.
At its current price, O stock’s monthly dividend rate gives it a generous annual yield of 4.6%.