Although the U.S. stock market has experienced numerous valleys alongside peaks in years past, for the most part, it's been on a long upward trajectory. That's wonderful for stock prices, but not really great for dividend yields (which decline when the dividend payer's share price rises). So stock yields above 4% are becoming rare these days.
There is one issuer that not only doles out a dividend well above that threshold, but it also does so far more regularly than almost all of its peers. And it might not be in a sector some would expect.
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A powerhouse in its sector
That sector is that sturdy old high-yield dividend holding pen: real estate investment trusts (REITs). Shareholder payouts by REITs are relatively lofty because, in order to benefit from certain tax advantages, they must distribute at least 90% of their taxable income in the form of investor dividends.
Comparatively speaking, there aren't many REITs in the S&P 500 index; by my count, there are currently 30. Of that pack, the one I'd single out is Realty Income (O -2.66%). I've been bullish on the company for years, and I still believe in its potential.
Realty Income owns and manages a massive portfolio of 15,500 retail properties, and most of the tenants occupying them pay more than just rent. They operate under what's called triple-net leases, in which they're also obligated to pay property taxes, insurance, and operating/maintenance costs for their spaces. This saves Realty Income quite a few greenbacks.
The company's real estate is typically in high-traffic shopping centers, one core reason why its latest occupancy figure was close to the ceiling, at 98.8%. What's more, many of those tenants are long-termers, as they operate recession-resistant businesses like supermarkets.
Despite worries in years past that e-commerce would cause a mass "retail apocalypse," Realty Income has not only survived but thrived. It consistently posts growth in its key fundamentals, at times quite high given its sprawl and size.
In its second quarter, total revenue rose by nearly 10% to $1.55 billion, while adjusted funds from operations (AFFO; a standard profitability metric for REITs) improved by 8% to just over $1 billion.
NYSE: O
Key Data Points
A model high-yield dividend
Because such growth is very much a feature, not a bug, for Realty Income, it has plenty of dollars on hand to fund a high-yield dividend that's also constantly on the rise. Earlier this month, it announced its 136th (!) dividend raise since its 1994 listing on the New York Stock Exchange.
This frequency is made possible by the REIT's monthly dividend, which is an outlier given the usual quarterly schedule of most dividend stocks. It's nice to get a paycheck from an investment every few weeks, and it's especially nice when it yields almost 5.5%.
Realty Income isn't a perfect company. Real estate businesses of all types lean heavily on leverage, as it's prohibitively expensive to buy and build properties. A Federal Reserve interest rate hike looks likely, which will surely ding the REIT's results. Also, as a relentlessly retail-focused operator, it's vulnerable to downturns in that sector.
Still, the company has overcome these challenges before, and I think it'll continue to be a cash-generating machine for a long time to come.
