Is This the MOST Extraordinary REIT?
REITs come in many different forms, but they have one thing in common. They receive special tax treatment—paying no corporate tax on earnings they payout. And payout they must—to qualify as securities, particular regulations require all REITs to make payouts of at least 90% of their rental income and capital gains each year.
REITs 101
Rain or shine, a REIT will pay the obligatory 90% dividend year after year to keep its special tax status alive. Failure to do so would cause them to lose this special status and be subjected to vastly different tax protocols.
Because they are eligible as securities, REITs are similar to mutual funds. The main difference is that they only make direct investments in mortgages or real estate.
REITs that are focused on mortgages invest in portfolios or mortgage-backed securities. Equity REITs generally invest in commercial properties, such as hotels, office buildings, parking garages, and shopping malls. A REIT that does both is typically referred to as a “hybrid.” REIT shares are bought and sold on the open market, the same as any publicly traded security.
Market-Beating Yield Makes This REIT Attractive
REITs typically grow dividends, with some even marketing themselves as a pathway to passive investment income. One such REIT, called Realty Income, has consistently delivered income growth year after year, unlike many similar trusts.
In the segment as a whole, negative dividend growth occurs about 11% of the time. Not so for Realty Income, which has continued paying increased dividends during periods of uncertainty—like now.
REITs, in general, grow their dividends each year, historically speaking. This is one of the reasons that secures REITs a rightful place in any portfolio. Large S&P 500 REITs have a typical yearly growth rate of around 2.9%. Realty Income excels here again, with a compound annual growth rate of 4.4%.
A Most Extraordinary REIT: 27 Years Of Growth
Realty Income, as they say in the UK, does what it says on the tin—that is, it lives up to its stated goals, year after year. The hint is in the name: the company intends to deliver dependable monthly income to its investors. All REITs pay dividends, but Realty Income pays dividends that rise steadily over time, again and again.
It has managed to do this for 27 years, without fail, earning it a spot in an elite group of dividend stocks. Even more so: they’re in the elite of the elite. Realty Income is one of only three such trusts—out of a total list of only 65 companies in the S&P 500—that can make that claim.
Another factor that sets Realty Income apart is its payout schedule. Other dividend-paying stocks hope to increase payouts on an annual basis. Realty Income has routinely given investors in the trust dividend raises four times a year at a minimum—for nearly 25 years in a row.
Market Chaos? No Problem For This REIT
The merit of Realty Income is in the effectiveness of its results. It’s one thing to say “we intend to be a source of reliable, and steadily climbing, income for our investors.” It’s another to deliver on that promise.
Realty Income can deliver in such an even-keeled, stable way despite global market turmoil that was unimaginable until it happened—the Covid-19 Pandemic and the Russian Invasion of Ukraine, for example. It does this by carefully managing its real estate portfolio.
Realty Income Has A Support Net
Realty Income holds diversified interests in net lease real estate. Net lease real estate is one of the safest bets in that sector. The lessee typically pays most—or all—of the taxes on a property, all costs associated with insurance, maintenance, and upkeep costs, and then, of course, the actual rent itself.
While relatively common in commercial real estate, a portfolio with a sizable net lease equity is robust. It can weather market fluctuations with relative aplomb because these net lease agreements displace much of the exposure to that sort of risk onto the tenant.
Free from fluctuating operating costs and variable insurance and tax payments, Realty Income is empowered to generate stable, dependable income that rises steadily over time—just as it promises. The result is a durable, predictable dividend payment schedule that investors can look forward to month after month.
A Credit Rating
Realty Income is a member of another elite club—one of just seven REITs with A-rated credit. That says a lot—the agencies responsible for the rating determine their grade based primarily on financial strength, which looks at leverage and liquidity, and its business risk of operations—or how unpredictable they judge the probability of income from the properties a rated body holds. An A rating for a REIT is a significant telltale.
A-rated credit gives Realty Income an enormous buffer against market unpredictability. Most of the “cost” of a down year is passed off to its net lessees to absorb, allowing the REIT to increase the amounts of its dividend payouts.
They’re selective with who they lease to, as well. Realty Income has a list of strict criteria on which it bases its acquisitions. This careful consideration has paid off time and time again.
Stable Passive Income
REITs are relied on as dividend payers, but those dividends typically rise and fall over time. Realty Income has a proven track record—an amazing one—of increasing its dividend payouts over and over. This track record—both in terms of performance, longevity, and frequency of payouts—makes Realty Income an solid buy for anyone looking for reliable, predictable passive income.
