This retail REIT is a reliable income investment. Realty Income (O -0. 09%), one of the world's largest real estate investment trusts (REITs), is often considered a dependable income investment.
It sports a forward yield of 5. 6%, it pays its dividends monthly, and it's raised its payout 131 times since its IPO in 1994.
As a REIT, Realty Income must distribute at least 90% of its pre-tax income to its investors as dividends to maintain a favorable tax rate.
It leases its 15,621 perties to 1,565 different clients in over 89 industries in the U. , and Europe, and its occupancy rate has never dipped below 96%.
It's also a capital-light triple net lease REIT -- which means its tenants need to cover their own perty taxes, insurance premiums, and maintenance fees. Image source: Getty Images.
Over the past five years, Realty Income's stock price fell 3%.
Many other REITs, it struggled in 2022 and 2023 as rising rates made it more expensive to purchase new perties, stirred up macro headwinds for its tenants, and drove some of its income investors toward risk-free CDs and T-bills.
But if we include its reinvested dividends, it still dered a total return of 25%.
So will Realty Income's stock rally over the next five years as interest rates decline, or does it face other unpredictable challenges. What happened to Realty Income over the past few years.
Realty Income merged with VEREIT in 2021 and Spirit Realty in 2024.
Those mergers more than doubled its number of perties from 2020 to 2024, but it still maintained a high occupancy rate as it grew its adjusted funds from operations (AFFO) and dividends per.
Metric 2020 2021 2022 2023 2024 Total year-end perties 6,592 10,423 12,237 13,458 15,621 Year-end occupancy rate 97. 7% AFFO per $3. 19 Dividends per $2. 17 Data source: Realty Income.
Some of Realty's top tenants -- including Walgreens, 7-Eleven, and Dollar Tree -- struggled with store closures over the past few years.
However, stronger tenants Dollar General, Walmart, and Depot consistently offset that pressure by opening new stores. Realty Income still doesn't generate more than 3.
4% of its annualized rent from a single tenant, and it locks its tenants into long-term leases with an average term of nearly 10 years.
That diversification and stickiness insulates it from economic downturns. What will happen to Realty Income over the next five years.
Over the next five years, Realty Income will ly expand in Europe to curb its dependence on the U. Un its leases in the U.
, most of its European leases are tethered to the consumer price index, which allows it to raise its rent to keep pace with inflation.
It will ly ramp up its investments in data centers to fit from the secular growth of the cloud and AI, and scoop up more perties at favorable prices in sale-leaseback deals (in which es sell their own real estate and lease it back to cut costs).
It could also expand into more experiential -- gyms, res, and restaurants -- to further diversify its portfolio.
Realty still generates most of its rental income from the retail sector, but those tenants should face fewer headwinds as inflation subsides and interest rates decline.
Lower interest rates should also make CDs and T-bills less attractive and drive more investors back toward REITs. From 2019 to 2024, Realty Income grew its AFFO at a CAGR of nearly 5%.
If it continues to grow its AFFO at a CAGR of 5% from 2024 to 2030 -- and still trades at 14 times its trailing AFFO -- its stock price could rise 33% to $77 within the next five years.
It should continue to raise its dividends and stay within its historical yield of 4%-6%.
So while Realty Income might not consistently beat the S&P 500 -- which has dered an average annual return of 10% since its inception -- it should remain a stable investment for investors who need a reliable of monthly income.
That's why I personally own s of Realty Income, and why I think it's a solid long-term play. Leo Sun has positions in Realty Income.
The Motley Fool has positions in and recommends Depot, Realty Income, and Walmart. The Motley Fool has a disclosure policy.