Real estate investment trusts, also known as REITs, are coming off a very difficult year. The real estate industry was hit hard last year by the coronavirus pandemic, which caused widespread closures of retail stores, restaurants, fitness centers, and more. If that weren’t bad enough, physical real estate was already under pressure heading in to 2020 due to the continued growth of e-commerce retail.
Putting it all together, it is clear that investors should be selective when evaluating REITs. Many REITs are attractive for their high dividend yields, but dividend safety is extremely important. For this reason, Realty Income (O) is our top-ranked REIT for 2021.
Earnings Results & Recent Events
Realty Income is a REIT that owns retail real estate properties. It has a large and diverse property portfolio, consisting of over 6,500 properties leased to roughly 600 different clients, operating across more than 50 different industries. Realty Income operates under the triple-net structure, meaning the three major sources of operating costs (taxes, maintenance, and insurance) are the responsibility of the tenant.
This is an advantageous structure for Realty Income, as it provides the company with a strong stream of cash flow which can then be used to acquire additional properties. The snow-ball effect of the business model has provided Realty Income with consistent growth for decades. Even in 2020, a highly challenging year for retail real estate, Realty Income generated strong cash flow which allowed it to keep paying dividends to shareholders.
In the 2020 fourth quarter, Realty Income generated revenues of $418 million, a 5% increase from the same quarter the previous year. Investments in new properties that the REIT made over the last four quarters were responsible for most of the increase in the company’s rent proceeds. Funds-from-operations came to $0.84 per share, slightly above analyst estimates.
For 2020, Realty Income grew revenue and adjusted FFO-per-share by 11% and 2%, respectively. It is impressive that the company was able to post growth in 2020, given the steep downturn experienced by the retail real estate industry.
While Realty Income saw a growth slowdown last year, the continued recovery from the coronavirus pandemic means the company should return to growth. Realty Income expects FFO-per-share of $3.47 for 2021, which would represent a company record.
Realty Income: The Monthly Dividend Company
Realty Income takes a great deal of pride in its dividend history, which is quite impressive. In fact, Realty Income has trademarked itself as The Monthly Dividend Company. Indeed, Realty Income is a member of a select group of stocks that pays its dividend each month, rather than on the more common quarterly payment schedule. Receiving 12 dividend payments each year is fairly appealing for income investors.
Not only that, but Realty Income has a long history of paying its dividend, and raising the dividend payout. The company recently declared its 610th consecutive monthly dividend, a streak that goes back over 50 years. Realty Income has also increased its monthly dividend 110 times since the company had its initial public offering in 1994. Realty Income qualifies as a Dividend Aristocrat, an exclusive group of 65 stocks in the S&P 500 Index that have each raised their dividends for at least 25 consecutive years.
Finally, Realty Income has a highly secure dividend payout. Its long streak of uninterrupted monthly dividends is a sign of its ability to outlast recessions and downturns in the real estate industry. The dividend payout remains safe for 2021, as the company has a projected dividend payout ratio of 81% in terms of expected 2021 FFO-per-share.
Realty Income, along with most REITs, struggled in 2020 due to the coronavirus pandemic. This led many securities in the sector to become undervalued, making real estate investing a reasonable place to allocate funds.
Once again, Realty Income proved its resilience by continuing to generate strong FFO, while raising its dividend. The stock has an attractive dividend yield of 4.2%, a long history of dividend growth, and a safe dividend payout. For these reasons, Realty Income is our top-ranked REIT for 2021.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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