Realty Income: Solid Yield, Diversified Portfolio

Investors looking for monthly income with capital appreciation potential might want to take a closer look at Realty Income Corporation (O).

The real estate investment trust has been around since 1969 and has traded on NYSE since 1994. It raised its dividend, which it pays monthly, every year for the last 11 years. As of writing, the stock yields around 7.5%.

The company has a diversified portfolio. It operates in 49 states and owns 2,375 properties, which it leases to over 100 retail chains spread across 30 industries. Its tenants include Jiffy Lube, Office Max, Staples, and Taco Bell, among many others. No industry accounts for more than 25% of its portfolio. In the most recent quarter, 97.4% of the company's properties were leased out, with an average remaining lease length of 13.2 years.

Over half of the company's properties were acquired from its customers and leased back to them. The firm uses the income from these leases to pay its operating expenses and debts. The rest goes to shareholders (the company limits its dividend payments to around 85% of free cash flow).

Realty Income Corp favors a conservative approach. It prefers long term net lease agreements where its customers pay the taxes and most of the other operating costs of the properties they rent. As a result, the company's gross margins have been close to 100% for at least the last 10 years. Realty Income has employed this strategy with great success since it was founded.

While Realty Income prefers to hold its properties for long periods, generating monthly income, its Crest subsidiary engages in property flipping. Crest engages in less transactions when property values fall. When property values rise, Crest picks up its activity, boosting profits.

There are a few risks that investors should consider carefully

Because the company leases its properties to retailers, it is sensitive to the economy. As the economy worsens, some of its tenants may not be able to pay rent. Economic conditions may also lower the number of new customers. While the property occupancy rate was an impressive 97.4% in the last quarter, this was a decrease from the 98.8% occupancy rate of the same quarter last year (note, though, that this reflects a number of newly acquired properties).

The company can be hurt by inflation. This would happen if inflation outruns Realty Income's rent increases.

The company grows by acquiring properties. The current credit crunch may limit its acquisition activities in the near term.

Realty Income also can be hurt by declining property values if it decides (or is forced) to sell any of its holdings.

Investors who are interested in monthly income with capital appreciation potential but favor a more diversified approach spread over various asset classes should consider the Claymore/BBD High Income Index ETF (LVL). It is spread out over dividend paying stocks, REITs, MLPs, preferred stocks, and closed end funds. As of writing it yielded 9.14%.

Comments

[bluesmoke]

Good article - as the baby boomers (me) retire, we are indeed looking for diversified monthly income. I'm surprised more companies haven't figured this out. Your suggestion of LVL is a good one. I had not heard of it and will probably buy some. One thing you may note is it is very thinly traded. That's one downside if you need to sell a large position. I also took this from their website:

As the ETF holds REITs, MLPs, preferred stocks, convertible securities, and closed end funds, beware for tax purposes that its distributions can include regular income, short term and long term capital gains, and qualified dividends. As it owns ADRs, a portion of its dividends may be withheld by foreign tax authorities.

[DividendGrowthInvestor]

I was a little negative on O when I first learned about the stock:

www.tickerspy.com/go.p...

Later on however, I turned bullish and even bought some after reading 2007 and 2006 annual reports.