This retail REIT is a safe and reliable way to generate income.
Realty Income (O -0.09%), one of the largest real estate investment trusts (REITs) in the world, is often regarded as a safe way to generate income. With a forward yield of 5.6%, it pays payments every month and has done so 131 times since its IPO in 1994.
Realty Income must distribute at least 90% of its pre-tax income to its owners as dividends to maintain its low tax rate as a REIT. From the U.S. to the U.K. and Europe, it rents out its 15,621 properties to 1,565 different companies, as well as more than 89 other businesses. Its occupancy rate has never dropped below 96%. You don’t have to invest any money in this triple-net lease REIT. This means that the renters pay their own property taxes, insurance, and maintenance costs.
The price of Realty Income stock has declined approximately 3% over the last five years. In 2022 and 2023, it struggled, just like many other REITs. Rising interest rates made it more expensive to buy new properties, caused macro headwinds for its renters, and pushed some of its income investors toward risk-free CDs and T-bills. However, if we count the profits that were reinvested, the yield still amounts to 25%. Will Realty Income’s stock increase over the next five years as interest rates decline, or will the company face other unforeseen challenges?
Where has Realty Income been for the past few years?
In 2021, Realty Income combined with VEREIT. In 2024, she joined forces with Spirit Realty. When it merged with other companies, it got more than twice as many buildings between 2020 and 2024. However, it kept a high occupancy rate and increased its adjusted funds from operations (AFFO) and dividends per share.
Some of Realty’s best customers, including Walgreens, 7-Eleven, and Dollar Tree, have faced challenges in closing stores over the last few years. However, stronger renters like Walmart, Dollar General, and Home Depot always open new stores to counteract that pressure.
It remains true that Realty Income doesn’t receive more than 3.4% of its annualised rent from a single tenant, and most of its tenants sign long-term leases that last over 10 years. Because it is diverse and stable, it is not affected by economic downturns.
In five years, what will happen to Realty Income?
Realty Income is expected to grow in Europe over the next five years, reducing its reliance on the U.S. market. In Europe, most of its deals are tied to the consumer price index, which lets it raise rent to keep up with inflation. This differs from the U.S. approach, which is likely to invest more in data centres to capitalise on the long-term growth of the cloud and AI markets. It will also acquire more properties at favourable prices through sale-leaseback deals, which are transactions where companies sell their properties and lease them back to save money. To further diversify its portfolio, it could also expand into more experiential areas, such as gyms, resorts, and restaurants.
Real estate still gets most of its rental income from retail tenants, but as inflation and interest rates decrease, those tenants should have fewer problems. Additionally, CDs and T-bills may become less appealing when interest rates decline, which should lead more buyers back to REITs.
Realty Income’s AFFO grew at a CAGR of almost 5% from 2019 to 2024. As long as its AFFO grows at a CAGR of 5% from 2024 to 2030 and its stock price remains at 14 times its current AFFO, it could see its price rise by 33% to approximately $77 over the next five years. It should continue to raise payouts and maintain a yield between 4% and 6%, which it has consistently achieved.
Although Realty Income may not consistently outperform the S&P 500 (which has delivered an average annual return of 10% since its inception), it remains a solid choice for individuals seeking a steady stream of monthly income. I own Realty Income shares, and it’s a good long-term investment.
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