Buy Realty Income Corp. For Safe, Increasing Monthly Income And Long-Term Total Return

About: Realty Income Corporation (O), Includes: BA, DLR, EOS, FCX, HD, HPQ, OHI, SLP
by: William Stamm

Realty Income Corp. is well diversified in the commercial real estate sector both in location and type of property.

The stock has increased its dividend for 25 years in a row (a dividend aristocrat) and presently has a yield of 4.1% which is above average.

Realty Income’s total return overperformed the Dow average for my 53-month-test-period by 7.60%, which is good for a commercial realty business that is well diversified.

This article is about Realty Income Corp. (O) and why it's a buy for the dividend income growth investor. Realty Income is one of the largest REITs in the commercial property sector. Realty Income is a conservative income investment that will be reviewed using the Good Business Portfolio guidelines.

The company has steady growth and has the cash it uses to develop new properties and increase the dividend each year.

When I scanned the five-year chart, Realty Income Corp. has a good chart going up and to the right in a steady, strong slope for four of the five years with a pause in 2017. The last year and a half have shown very strong growth of over 30%.

Chart Data by YCharts

Fundamentals of Realty Income Corp. will be reviewed on the following topics below.

  • The Good Business Portfolio Guidelines
  • Total Return and Yearly Dividend
  • Last Quarter's Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, August 2018." These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Realty Income Corp. passes 10 of 11 Good Business Portfolio Guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

  1. Realty Income Corp. does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield, with 25 years of increasing dividends and a 4.1% yield. Realty Income Corp. is, therefore, a good choice for the dividend growth income investor. The five-year average payout ratio is high at 84%. After paying the dividend, this leaves cash remaining for investment in expanding the business by buying bolt-on properties.
  2. I have a capitalization guideline where the capitalization must be greater than $10 billion. Realty Income passes this guideline. Realty Income is a large-cap company with a capitalization of $21.04 billion. Realty Income Corp. 2019 projected FFO flow at $3.33 is good, allowing the company to have the means for company growth and increasing the dividend.
  3. I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The one-year forward CAGR of 6.0% does not meet my guideline requirement, but I believe the good United States economy will outperform and allow the CAGR to increase. The good future growth for Realty Income Corp. can continue its uptrend, benefiting from the continued growth of the economy of the United States.
  4. My total return guideline is that total return must be greater than the Dow's total return over my test period. Realty Income passes this guideline since the total return is 55.29%, more than the Dow's total return of 47.69%. Looking back five years, $10,000 invested five years ago would now be worth over $20,300 today. This makes Realty Income Corp. a fair investment for the total return investor looking back that has future growth as the economy continues to grow and the need for commercial property increases.
  5. One of my guidelines is that the S&P rating must be three stars or better. Realty Income's S&P CFRA rating is three stars or hold with a target price of $73, passing the guideline. Realty Income's price is presently below the one year target by 4%. Realty Income is below the target price at present and has an average price to FFO of 20, making Realty Income a fair buy at this entry point for a quality income REIT.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is fair, and an above average yield makes Realty Income a good business to own for income and growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes Realty Income interesting is the potential long-term growth as the economy and population grow giving you an increasing dividend for the dividend growth income investor with a total return that beats the market.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Realty Income Corp. is higher against the Dow baseline in my 53-month-test compared to the Dow average. I chose the 53-month-test period (starting January 1, 2015, and ending to date) because it includes the great year of 2017, and other years that had a fair and bad performance. The fair total return of 55.29% makes Realty Income Corp. a fair investment for the total return investor that also wants a steadily increasing income.

DOW's 53 Month total return baseline is 47.69%

Company name

53 Month total return

The Difference from DOW baseline

Quarterly dividend percentage

Realty Income




Realty Income has an above-average dividend yield of 4.1% and has had increases for 25 years, making Realty Income a great choice for the dividend growth income investor. The dividend was last increased in January 2019 to $0.226/month from $0.221/month or 2.2%. The monthly dividend is usually increased every three to six months.

The graphic below shows the constant increase in the dividend over the last 25 Years.

Source: Earnings call slides

Last Quarter's Earnings

For the last quarter on May 1, 2019, Realty Income reported FFO earnings that beat by $0.03 at $0.73, compared to last year at $0.78. Total revenue was slightly lower at $219.75 million less than a year ago by 0.7% year over year and beat expected revenue by $26.78 million. This was a good report with bottom line beating expectations and the top line declining with a small decrease compared to last year. The next FFO earnings report will be out August 2019 and is expected to be $0.81 compared to last year at $0.79 an increase.

Business Overview

Realty Income Corp. is one of the largest REITs of commercial property in the United States.

As per excerpt from Reuters

Realty Income Corporation is a real estate investment trust (REIT). The Company is engaged in in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology and capital markets capabilities.

As of December 31, 2016, the Company owned a diversified portfolio of 4,944 properties located in 49 states and Puerto Rico, with over 83.0 million square feet of leasable space leased to 248 different commercial tenants doing business in 47 separate industries.

The 4,944 properties in the portfolio, 4,920, or 99.5%, were single-tenant properties, and the remaining were multi-tenant properties. The 4,920 single-tenant properties, 4,836 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.8 years.”

The graphic below shows the diversification across different business types.

Source: Earnings call slides

Overall, Realty Income Corp. is a great business with a conservative 6% CAGR projected growth as the economy grows going forward with the increasing need for more commercial property. The steady earnings and revenue growth provides Realty Income the capability to continue its growth as the FFO increases as new properties are added to their portfolio.

Recently on May 7 Realty Income sold 11 million shares and received $735 million cash which it can use to pay down debt on its $3 billion unsecured credit line and use some of the cash for potential investment opportunities. This indicates that Realty Income can grow its business and increase the projected CAGR.

The graphic below shows the top 20 tenants managed by Realty Income that include many household names.

Source: Earnings call slides

The Fed has kept interest rates low for some years, and on December 19, 2018, they raised the base rate of 0.25%, which was expected. I believe that they will go slow in 2019, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States' growth going forward with better economics for the consumer. At the March 20 meeting, the Fed lowered United States GDP projection for 2019 which they said are getting to neutral on the economy, projecting no rate increases for 2019. The Fed meeting statement was a wait and see and a bit more dovish than the last meeting. At the May 1 meeting, they did not raise rates and keep them the same.

From May 1, 2019, earnings call Sumit Roy (Chief Executive Officer and President) said,

We are pleased to begin 2019 with another successful quarter. During the quarter we invested approximately $520 million in high-quality real estate and investment spread, well above our historical average and we continue to see ample transaction flow that meets our investment parameters. Subsequent to quarter end, we announced our international expansion through a GBP429 million sale-leaseback transaction in the UK with Sainsbury's under long-term triple-net leases.

This represents a natural evolution of our Company's strategy, and we will continue to grow our international platform as we are well-positioned to capitalize on a significant addressable market in the UK and mainland Europe. From a strategic standpoint, we believe there is a dearth of large institutional buyers pursuing the quality of single tenant net leased assets in Europe that we intend to invest in. Given our portable size, scale and cost of capital advantages, we believe we have a unique ability to execute sizable portfolio transactions with best-in-class operators.

This transaction was relationship-driven and was completed on an off-market negotiated basis. We look forward to further developing relationships with other industry leaders like Sainsbury's as we expand our international platform. Concurrent with the announcement of our sale-leaseback transaction with Sainsbury's, we increased our 2019 AFFO per share guidance to a range of $3.28 to $3.33 from a prior range of $3.25 to $3.31, and we increased our 2019 acquisition guidance to a range of $2 billion to $2.5 billion.

Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property type, which contributes to the stability of our cash flow. At quarter end, our properties were leased to 261 commercial tenants in 48 different industries located in 49 states and Puerto Rico. 82% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at nearly 12% of rental revenue.

Occupancy, based on the number of properties, was 98.3%, a decrease of 30 basis points versus a year ago period. We expect occupancy to be approximately 98% in 2019. During the quarter we released 71 properties, recapturing approximately 105% of the expiring rent. Since our listing in 1994, we have released or sold over 2,900 properties with leases expiring, recapturing over 100% of the rent on those properties that were released. Our same-store rental revenue increased by 1.5% during the quarter. Our projected run rate for 2019 continues to be circa 1%. Approximately 86% of our leases have contractual rent increases."

This shows the feelings of top management to the continued growth of the Realty Income Corp. business and shareholder return with an increase in future growth. Realty Income has good constant growth and will continue as the United States' economy grows.


Realty Income Corp. is a good investment choice for the dividend growth income investor with its above average dividend yield and a fair choice for the total return investor. The Good Business Portfolio did add Realty Income to its income holdings in January 2019, and I want to add to this position when cash is available. If you want a growing dividend income and steady total return in the commercial property business, Realty Income may be the right investment for you. The entry price right now is fair; quality income investments do not come cheap.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio, so I can invest in good companies on my buy list.

  • On May 6, added to the position of Digital Realty Trust (DLR) from 3.40% of the portfolio to 3.60%. I will add slowly to this position as available cash allows and want to get it to 4% of the portfolio, a full position.
  • On April 22, sold all of the remaining HPQ position. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On March 26, trimmed position of HPQ from 1.0% of the portfolio to 0.6%. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On March 22, added to position of Simulations Plus (SLP) from 0.45% of the portfolio to 0.60%. I will add slowly to this position as available cash allows.
  • On March 13, increased position of Realty Income Corp. to 0.85% of the portfolio, I could use a bit more steady monthly income.
  • On March 12, the portfolio closed out the position of Arconic (ARNC), I only have one more commodity play Freeport-McMoRan (FCX) that I think will go up over time.
  • On March 11, the portfolio reduced the position of Arconic from 0.4% of the portfolio to 0.3%. I will sell the rest of this position within the month. The dividend was just cut, and forward growth is under-par.
  • On March 7, added to position of Simulation Plus from 0.33% of the portfolio to 0.45%. I will add slowly to this position as available cash allows.
  • On March 4, trimmed position of HPQ from 1.3% of the portfolio to 1.0%. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On February 28, trimmed position of Boeing (BA) from 16.1% of the portfolio to 15.8%. I love Boeing, but you have to have diversification.
  • On February 2, increased position of Realty Income Corp. to 0.7% of the portfolio, I could use a bit more steady monthly income.
  • On January 28, Bought a starter position of Realty Income Corp., I could use a bit more steady income and hope to add to this holding in the future. Realty Income Corp. is now 0.4% of the portfolio.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The five top percentage of the portfolio companies in the portfolio are, Johnson & Johnson (NYSE:JNJ) is 8.1% of the portfolio, Eaton Vance Enhanced Equity Income Fund II (EOS) is 8.2% of the portfolio, Home Depot (HD) is 9.6% of the portfolio, Omega Health Investors (OHI) 8.1% of the portfolio and Boeing is 13.6% of the portfolio. Therefore BA, EOS, JNJ, OHI, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.

Boeing is going to be pressed to 15% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 million in the first quarter of 2017, an increase from the fourth quarter. The first-quarter earnings for 2018 were unbelievable at $3.64 compared to expected $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 billion, and both companies had a great number of orders. Boeing received an order for 18 more KC-46A planes. The second-quarter 2018 earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write-off expense on the KC-46 which has started delivery in 2019. Eight KC-46A tankers have been delivered YTD for 2019. Boeing has dropped in the last 6 weeks because of the second 737 Max-8 crash, and I look at this as an opportunity to buy BA at a reasonable price. This is just my opinion.

JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-BREXIT world. Earnings in the last quarter beat on top line and bottom line and Mr. Market did nothing. JNJ has just increased the dividend to $0.95/Qtr., which is 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

The total return for the Good Business Portfolio is ahead of the DOW average YTD by 4.10% which is a nice gain above the market for my portfolio. Each quarter after the earnings season I write an article giving a complete portfolio list and performance, the latest article is titled “The Good Business Portfolio: 2018 4th Quarter Earnings and Performance Review.” Become a real-time follower, and you will get each quarter's performance after the next earnings season is over in a few weeks.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, EOS, LMT, O, HPQ, SLP, DHR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.