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Realty Income (O): A ‘Boring’ Dividend Stock With Solid Earnings

If you’re retired, Realty Income is a no-brainer to own

Realty Income (NYSE:O) reported fourth-quarter earnings on Tuesday, missing analyst funds from operations (“FFO”) estimates by a penny. Revenues came in at $248 million, actually beating analyst estimates of $230 million by a pretty wide margin.

Realty Income NYSE:OAnd you know what? I could really care less what Realty Income did last quarter. Realty Income’s quarterly numbers don’t matter to me at all. And I say this as a long-term holder of O stock.

Realty Income is one of my very favorite long-term stocks precisely because of its boring disposition. Realty Income doesn’t really “do” anything. It simply buys quality free-standing retail properties that, as a general rule, are already throwing off healthy cash flows and then converts those cash flows into monthly dividends for its shareholders.

And as a triple-net landlord, Realty Income doesn’t have to worry about leaky toilets or peeling paint. All maintenance, insurance and taxes are the tenants’ responsibility.

I almost feel sorry for the Wall Street analysts that cover O stock. Following a stock that is this steady and predictable must be mind-numbingly boring!

Just for grins, let’s take a look at some of details of the earnings release. Funds from operations per share rose 4.9% for the quarter and 7.1% for the full calendar year. Same-store rents rose by 1.5%, keeping pace with the rate of inflation. The dividend was raised by a modest 2.1%, but this followed a 20% increase the year before. In January, Realty Income raised its dividend again, by 3%.

Over the past 10 years, Realty Income has raised its dividend at a 5% annual clip. That’s very solid for a company whose business model is about as exciting as watching an English cricket match on TV.

But the consistency goes beyond that. With January’s dividend hike, Realty Income has boosted its monthly dividend 79 times in the past 20 years and in 70 consecutive quarters. And as a result, O stock was rewarded with membership in the exclusive S&P High Yield Dividend Aristocrats Index.

Realty Income is not a sexy stock and it’s certainly not one to buy if you’re looking to get rich quick. But it is one of the few stocks anywhere in the world that I believe you can really buy and hold forever. Unless Realty Income decides to merge with another REIT—or unless the Walking Dead zombie apocalypse finally happens—I can say with certainty that I expect O stock to look the same 20 years from now, throwing off a stable monthly dividend from a portfolio of high-quality properties.

If you’re retired, Realty Income is a no-brainer to own. Its monthly dividend is tailor-made to meet regular living expenses, and — unlike bonds — should actually keep up with inflation over time. But if you’re still saving for retirement, you can turn Realty Income into a growth machine by reinvesting the monthly dividends in new shares, putting the power of compounding to work.

Between the current dividend yield of 4.4% and the long-term dividend growth rate of 5%, you’re looking at potential gains of nearly 10% per year, indefinitely.

Is there anything not to like about Realty Income?

Well, there is the great unknown: What happens when bond yields eventually rise?

Higher borrowing costs from rising yields will eat into profits, all else equal. But this is not something that worries me too deeply. Higher borrowing costs will mean that Realty Income will simply require higher cap rates on the properties it buys.

What concerns me is that Realty Income is essentially viewed like a bond to Wall Street. And if bond yields rise, prices of bonds and bond substitutes like O stock should fall.

The good news is that I expect this problem to remain theoretical for the next several years. I don’t see the 10-year Treasury yielding substantially more than 3% before 2020. When yields do eventually rise, Realty Income will take its knocks. But between now and then, investors can safely collect a solid and growing monthly dividend.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long O.

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