If You Want to Earn Monthly Dividends, Read This
When it comes to rewarding shareholders with monthly dividends, few companies have done a better job than Realty Income Corp (NYSE:O). Known as “The Monthly Dividend Company,” Realty Income has been paying uninterrupted monthly dividends since its founding in 1969. For the record, that’s 571 consecutive monthly dividend payments.
Most recently, however, real estate stocks haven’t been a hot commodity. With the market expecting more interest rate increases from the U.S. Federal Reserve, people are worried whether real estate investment trusts (REIT) will be able to handle higher debt repayment burdens in the future.
And because Realty Income Corp is one of the most well-known REITs in the market, its stock has been targeted by short sellers. Over the last three months, O stock has tumbled more than 10%—a quite sizable move for a large-cap company.
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But does that mean it’s time for income investors to ditch this San Diego, California-based real estate giant? Not really.
You see, for investors looking to earn monthly dividends, the most important thing to consider is the company’s dividend-paying ability. On that front, Realty Income is still more than solid.
To put it simply, Realty Income is a giant landlord. The company owns more than 5,100 properties, most of which are freestanding buildings in prime locations with good access and visibility. They are leased to tenants under long-term net lease agreements, usually between 10 to 20 years. The company then collects monthly lease payments from tenants and distributes some of them to shareholders in the form of monthly dividends.
As of December 31, 2017, Realty Income had a portfolio occupancy rate of 98.4%, matching its highest year-end occupancy rate over the last decade. The properties had a weighted average remaining lease term of nine-and-a-half years. This would allow the company to generate a steady stream of rental income going forward. (Source: “Realty Income Announces Operating Results for Fourth Quarter And 2017,” Realty Income Corp, February 21, 2018.)
The portfolio is well-diversified as well. By the end of 2017, Realty Income’s portfolio contained properties located in 49 states and Puerto Rico. They were leased to 249 tenants coming from 47 different industries. By limiting tenant concentration, Realty Income makes sure that, if one of the tenants can’t pay its rent, it would not have too much of an impact on company-level financials.
In fact, the company’s stable business model has allowed it to pay not only a steady dividend, but an increasing one. Since Realty Income began trading on the New York Stock Exchange in 1994, the company has raised its payout 95 times, the last 81 of which have been consecutive quarterly dividend increases. (Source: “Realty Income Announces Dividend Increase of 4%,” Realty Income Corp, January 16, 2018.)
Despite these aggressive dividend hikes, the company still maintains solid distribution coverage. In 2017, Realty Income generated adjusted funds from operations (FFO) of $3.06 per share while paying total dividends of $2.527 per share. That translated to a payout ratio of 82.6%, leaving a margin of safety.
What about its debt repayment burden under rising interest rates? Well, Realty Income has a solid balance sheet, with a debt-to-total-market-capitalization ratio of just 27.4%. Moreover, the company has a well-laddered debt maturity schedule, and 98% of its debt bears interest at fixed rates. Therefore, even when interest rates rise substantially, the increase in the company’s debt repayment burden will likely be limited. (Source: “Institutional Investor Presentation,” Realty Income Corp, last accessed February 28, 2018.)
In other words, Realty Income has no problem paying monthly dividends and is well-positioned to continue its track record, even with rising interest rates. And, because of the recent downturn in its share price, the company now offers an attractive yield of 5.3%. Instead of bailing out, income investors may want to use the pullback in O stock as an opportunity to lock in an oversized monthly income stream.