By Carla Pasternak
As the name suggests, these preferred shares are backed by real estate income trust [REIT] Realty Income (NYSE: O-PD) (NYSE:O). You won't easily find a more dividend-friendly company -- the corporate website even greets you with the slogan: "Welcome to the Monthly Dividend Company."
Realty generates monthly dividends for both its common and preferred shares by leasing space to retail chains across the U.S., with a focus on the southeastern states. Tenants include restaurants, convenience stores, childcare facilities, and automotive repair shops. Realty buys the property from retail chains then leases it back to them under long-term 15 or 20-year contracts, providing a steady income stream.
Dividend: The preferred shares pay a dividend of $1.844 per share annually, giving them a yield of 7.5%. The payment is doled out in monthly installments and is cumulative, meaning eventually you should get any dividends that are suspended if the company hits a cash crunch and then recovers.
And these payments should be secure, with an investment-grade rating of "Baa3" from Moody's and "BBB-" from Standard & Poor's. Although these preferreds are traditional equity, dividends from preferred shares issued by REITs are taxable as ordinary income. Shareholder information can be reached at 1-877-218-2434.
Performance: As you would expect from the company's long-term contracts, earnings have remained at a consistent level for years. The company does get some upside from rental increases built into the contracts and from buying and selling properties.
Expected earnings of around $197 million this year should be more than ample to cover the $74 million in dividend payments on all the company's outstanding preferred share issues. Realty's balance sheet is also strong, with debt accounting for less than half of the firm's total capitalization.
Outlook/Valuation: Despite the company's stable earnings profile, the common and preferred shares have been weighed down by concerns that trusts like Realty will have a hard time financing future growth in today's tight credit markets. Further, inflationary pressures could erode the value of the company's long-term contracts. Still, the company has proven its ability to weather difficult economic cycles over its 39-year history.
Although they have no maturity date, the shares can be called on or after May 27, 2009. If called, you would get back the par value of $25 per share. Realty's preferred shares offer a conservative investor secure monthly income with the potential for capital gains.