Realty Income is an interesting company for a couple of reasons: the starting yield is usually high, with investors throughout much of its publicly traded life being able to establish a position with an initial yield of at least 5%. The dividend grows each year, which is an unusual characteristic once you leave the tobacco, telecom, and oil industries (although real estate can be a close fourth). And the dividends get paid out monthly, giving you the ability to instantly compound because your dividend income immediately buys new shares every month that then start paying out dividends all of their own.

As you can imagine, those factors combine together to produce pretty amazing results when you choose to reinvest your dividends back into the REIT.

First, let’s look at what Realty Income’s are returns are when you just add up the share price appreciation and the dividends paid out over the past two decades. For someone that invested $15,000 this time two decades you, you would have seen your shares appreciate in value by $60,000 while $47,000 in dividends get sent your way. That’s very impressive in its own right—how many places can you go where just by setting aside some initial money and doing absolutely nothing thereafter, you’d receive 3x the amount of money you invested over a twenty-year period? That $47,000 could have diversified a portfolio in its own right, giving you $15,000 positions in Exxon, Colgate-Palmolive, Nestle, or whatever other particular investment caught your eyes over the years. Plus, you’d have $2,000 in walking around money.

But what happened if you reinvested, choosing to delay gratification for a while to let Realty Income grow on its own for awhile, seeing what happens when you keep plowing and plowing those monthly dividends back into more dividends that start to take off all on their own?

Without dividends reinvested, Realty Income delivered annual returns of 11.3% per year over the past twenty years. With dividends reinvested, Realty Income delivered annual returns of 16.1% over the past twenty years.

Just how ridiculous is that five percent spread on a $15,000 investment, when it’s allowed to play out for twenty years? You would have collected $115,000 in total dividends, leaving you with $281,000 in total at the end of the period (all those additional shares plus the original shares you had working for you added another $150,000+ to your wealth totals over the period).

You’d be collecting $14,300 in annual income, bringing you very close to that hallowed moment when you receive more in annual income from an investment than you paid at the time you made it.

Why would someone ever give up an asset like this? I know some people are worried about rising interest rates, and it’s probably true that a sharp spike in rates could slow down the company’s funds from operations growth and bring the price of the stock down a bit for a couple years. The potentially ironic part for the long-term Realty Income holder is that those reinvested dividends at lower prices might actually create more wealth than otherwise as a lower price would create  more shares, boost the income, and turbo-charge the returns a bit.

What I find most interesting is that Realty Income’s dividend has only increased 96% over the past two decades. It just sort of meanders along, slowly mozying upwards. Most people hardly notice the stock at all. But when you take a 5-6% starting yield that is growing and keep reinvesting a chunk of it month after month, you end up having this situation where you get 16% annual returns with dividends reinvested for twenty years running even though the dividend is only on the cusp of doubling over that period. This is that area of investing where income investing can make you a lot richer than you’d think.

Originally posted 2014-09-26 08:00:56.

Like this general content? Join The Conservative Income Investor on Patreon for discussion of specific stocks!