The Monthly Dividend Machine That Always Replenishes You With Fresh Cash

Realty Income has been paying out monthly dividends for 45 years. Since being listed on the New York Stock Exchange in 1994, the monthly dividends have increased at a faster clip. Realty Income is one of the few monthly payers you can buy without having to sacrifice the quality of your business.

Realty Income has been paying out monthly dividends for 45 years. Since being listed on the New York Stock Exchange in 1994, the monthly dividends have increased at a faster clip. Realty Income is one of the few monthly payers you can buy without having to sacrifice the quality of the investment. 

In the world of monthly-paying dividend stocks, there tends to be a recurring problem: companies that choose to pay dividends monthly tend to do so for gimmicky reasons to mask the inferior quality or growth prospects of their holdings, and treat the monthly cash payout as an excuse to seduce income investors who would otherwise have no interest in buying the stock (note: I’m not referring here to energy MLPs that pay dividends monthly nor closed-end funds that pay dividends monthly).

There is where Realty Income enters the picture. For a real estate company, Realty Income has a record of taking care of income investors that is unmatched in its industry. It has been paying dividends every month for the past 45 years, and in addition to paying out cash every month, has generally adopted the informal practice of raising the dividend every quarter.

It doesn’t get a whole lot of attention outside of income investing circles because people that focus on stock price won’t necessarily see that sharp of movements in the stock price each year, even though, on a long-term basis the capital appreciation is there (the price of $8-$9 per share in 1994 at the end of its introduction to the New York Stock Exchange has increased to $43 today).

But to a lot of people, the dividends are invisible.  If you did not reinvest your Realty Income shares in the past twenty years, you would have collected $3.08 in cash for every dollar you invested. Put another way, those $9 shares would have paid you $27.72 in total dividends over the past two decades, a substantial addition to the capital appreciation that took you from $9 to $43. In a way, it is as if the stock is trading at $70-$71 per share, except most people would be none the wiser because they aren’t thinking about dividends paid out in June 2003 or willing to do much looking beyond the ticker tape.

If you not only possessed the extraordinary intelligence to identify Realty Income as a good investment twenty years ago but also had the superior discipline to reinvest your dividends along the way, the results start to get silly. Every $1 that you invested into Realty Income twenty years ago would have paid out $7.45 in dividends per share as you kept adding new shares to a dividend machine that would pay out higher and higher amounts of cash each month (in addition to the regular dividend increases received along the way).

In this case, it as if an investor that paid $9 per share would be looking at a total of $67.05 in total dividends collected plus $34 in share price appreciation. The investment would have increased ten-fold in the past twenty years, mostly due to the doggedly reinvestment of the dividends that kept increasing (as an aside, isn’t it interesting that a twenty-year investment in Realty Income roughly parallels the results achieved by Sears investors in the past twenty years? You always hear the abstract comment “there are so many ways to build wealth in America”, but this highlights the disparity; a company cutting itself up gradually yielded the same returns as a rock-solid real estate income that takes its mission to drown shareholders in annual income seriously).

Realty Income has generally been able to offer such smoothed growth because they operate what people in the industry call “triple-net lease” arrangements. Think of it like this: when you rent a property, you’re generally expected to pay the rent and utilities. What makes triple-net leases different is that, in exchange for getting a lower price owed on the monthly rent, you agree to pay (1) all the real estate taxes on the property, (2) all the necessary maintenance for the property, and (3) all the required insurance for the property. It’s not a magic formula for added value unless you’re especially good at arbitrage—after all, the rent is lower because Realty Income’s tenants agree to take on these obligations. But it does lead to smoother performance because you don’t have to deal with $3.5 million maintenance bills showing up unexpectedly, and that can partially explain why Realty Income has done such a good job of giving its investors linear dividend increases that are paid with such regularity.

The funds from operations that Realty Income generates don’t fluctuate all that much; throughout the financial crisis, the cash generated by Realty’s holdings hovered in the $1.80 per share range.

Even though you don’t hear Realty Income discussed all that much, it is one of those stocks that quietly makes the life better for those who own its shares. Someone that acquired $43,000 worth of the stock (roughly 1,000 shares) would be collecting $2,100+ every month from this holding alone. Getting situated so that $180 dividend checks show up in your account monthly is a good habit to get your financial self into. As an aside, this is a stock that can get you where you need to be if you’re patient: someone that only had, say, $15,000 to invest ten years ago would be in the position today of collecting the $2,000+ annual dividends from Realty Income. If you don’t have the cash on hand, just acquire something, and then you can let time do the heavy lifting.

Realty Income fills a niche in the portfolios of a lot of retirees because it has a higher initial yield than most REIT indices that have 3-4% annual dividend payouts, and its record of growing dividend payments is better than the index as a whole. Compared to most blue-chip stocks frequently discussed here that pay dividends quarterly, Realty Income has the advantage of offering a 5% yield instead of a 2-3% initial yield, and comes with the advantage of monthly cash. When someone is building a diversified portfolio and has the Nestles, Johnson & Johnsons, Coca-Colas, ExxonMobils, and Colgate-Palmolives well taken care of, then Realty Income is one of those stocks you find yourself coming to when you ask yourself the question, “Where do I look next?”


Originally posted 2014-06-09 19:49:18.

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