One Of The Best, Most Reliable Dividends Around

Nathan Slaughter's picture

Wednesday, May 22, 2019 - 2:30pm

by Nathan Slaughter

One of the biggest winners in my High-Yield Investing premium newsletter portfolio can trace its origins back to 1969 when its founders purchased their first property (leased to a Taco Bell). By the time it went public in 1994, the portfolio had increased in size to 630 properties worth $450 million.

Today, Realty Income (NYSE: O) has amassed a real estate empire spread across 49 states from coast to coast, encompassing 5,797 commercial properties with a book value of $16.5 billion. 

Most of the firm's portfolio is invested in freestanding retail properties located in prime, high-traffic spots. And they are leased to reliable tenants that dutifully pay their rent on time each month -- like Taco Bell, Circle K, Walgreens (NYSE: WAG) and Regal Cinemas (NYSE: RGC). 

Realty Income likes to refer to itself as the "Monthly Dividend Company." And it certainly lives up to the billing. Thus far, investors have been treated to 587 consecutive monthly paychecks.

Make no mistake, this company was built for a single purpose: to throw off a rising stream of tax-advantaged rental income. Because the company is structured as a REIT, every penny of profit is exempt from the tax bite of Uncle Sam. That leaves more cash on the table to be divvied up. And distributions are paid out monthly, which means your interest compounds even faster.

Not only that, but between the 1994 IPO and today, Realty Income has delivered market-crushing annual returns of 16.9% -- raising dividends for 86 consecutive quarters.

It has accomplished all that without ever stepping foot outside U.S. borders. But for the first time, Realty Income is expanding its territory overseas. On April 23, the company announced the $557 million acquisition of 12 superstores in the U.K. from Sainsbury (one of Europe's largest grocery chains). The deal is structured as a sale-leaseback agreement, whereby the previous owner will stay on as a rent-paying tenant.

This purchase is a good fit. While many retail landlords have struggled to cope with the wave of bankruptcies and store closures that have led to vacant units in malls and strip centers, Realty Income owns free-standing properties leased to convenience stores, drugstores, fast food outlets and other tenants that are largely insulated from digital competition. In fact, the company estimates that about 96% of the firm's rental income is shielded from e-commerce threats. And that's exactly why it currently boasts a stellar occupancy rate of 98.6%.

Sainsbury will fit right in. This is one of the biggest grocery chains in the U.K, with 1,400 locations that generate more than $30 billion in annual sales. The incoming properties have an average remaining lease term of 15 years, with automatic annual rate hikes built in. This purchase is expected to close within the next 30 days and will be immediately accretive to earnings. As a result, management is upping its 2019 adjusted funds from operations (AFFO) outlook by a few cents to between $3.28 and $3.33 per share.

But that's not all the company's been up to lately...

Fresh on the heels of the U.K. deal, Realty Income has struck another major sale/leaseback arrangement closer to home. The terms of the deal call for Cineworld (owner of the Regal Cinema chain) to sell 17 multiplex theatres to Realty Income for $287 million. Upon closing, the previous owner will rent these movie theatres back under a 15-year lease. 

Action to Take 
Financial details on this new deal are scant at this point, but Realty Income hasn't generated a market-crushing return over the past quarter-century by accident. The company typically earns cap rates (annual net operating income as a percentage of property value) on its investments that outweigh its cost of capital by a comfortable cushion. 

These latest acquisitions further diversify both the portfolio and the tenant base and will help deepen cash flows. 

Not one company in a thousand has paid dependable monthly income for as long as Realty Income. Bottom line: It is quite simply one of the best and most reliable dividend stocks around. In fact, we're up by more than 106% on our position in High-Yield Investing, and we're also earning a yield of nearly 7% based on our entry price. And while you're "only" getting around 4% if you buy today, if history is any guide, the dividend will continue rising -- which is why it remains a "Buy.

P.S. If you want more picks like this, then consider joining us over at High-Yield Investing. You don't have to settle for the paltry yields offered by most of the market... my team and I routinely find safe, reliable stocks, funds, REITs, MLPs and more offering yields of 6%, 7%, 10% and more. To learn more, simply visit this link.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.