This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
There are many different types of dividend payment schedules. Most stocks that pay dividends do so quarterly, but there are other stocks that pay dividends once per year or semi-annually. Monthly dividend stocks are particularly attractive, because they pay dividends every month, meaning 12 dividend payments per year instead of four, two, or one.
As a result, income investors who desire more frequent payments than the quarterly dividend stocks provide, might want to consider monthly dividend stocks. Investors should note the elevated risks with some monthly dividend stocks, particularly the mortgage REITs and Business Development Companies, or BDCs.
Therefore, investors interested in monthly dividend stocks should consider safety first and foremost. When it comes to dividend safety, no monthly dividend stock can match Realty Income (O). With a combination of a high dividend yield and a high degree of safety, Realty Income is the top monthly dividend stock.
Time-Tested Business Model
Realty Income is classified as a Real Estate Investment Trust, or REIT. The business model for REITs like Realty Income is to own physical real estate properties which are leased to tenants. With a focus on retail real estate properties, Realty Income collects cash flow from its properties, which is then used to purchase new properties. Growth is achieved through acquisition of new properties, and from yearly rental increases on existing properties.
The company’s portfolio consists of over 6,500 retail properties, spread across 630 different tenants, in 51 industries. Its top tenants, as a percentage of revenue, include Walgreens, 7-Eleven, Dollar General, FedEx, and Dollar Tree/Family Dollar stores. These top tenants are holding up fairly well in the coronavirus crisis, having been allowed to remain open.
Realty Income also benefits from operating the triple-net model. As a triple-net REIT, Realty Income collects a steady stream of rental income, while simultaneously placing three of the biggest operating costs—taxes, insurance, and maintenance—onto the tenant. This is advantageous structure for Realty Income.
The REIT has a large and diverse tenant portfolio. Its tenants operate in the retail industry, which is challenged right now due to the rise of e-commerce and the coronavirus. Internet retail and the explosive growth of e-commerce giant Amazon has severely impacted foot traffic for brick-and-mortar retail, particularly malls. However, Realty Income has mitigated this effect by focusing on high-quality tenants that generate steady cash flow by selling mainly non-discretionary items.
In addition, Realty Income’s properties are primarily freestanding, meaning they are not attached to any other structure. In this way, Realty Income has avoided most of the carnage sweeping through the major mall REITs like Simon Property Group (SPG).
Lastly, the coronavirus crisis caused lockdowns across the U.S., and while many stores are reopening, the retail industry remains severely distressed. Realty Income is not immune from the coronavirus, but it has fared better than most REITs. In the 2020 first quarter, Realty Income generated revenues of $414 million, up 17% year-over-year. Revenue growth was due to a combination of rental increases at existing properties, as well as new property acquisitions. Funds-from-operations, a commonly used measure of cash flow for REITs, increased 7% year-over-year. Rent collection during April and May exceeded 80% and reached 85% in June, reflecting continued improvement from the worst of the coronavirus crisis.
“The Monthly Dividend Company” Delivers
Realty Income has trademarked itself as The Monthly Dividend Company. It should come as no surprise, that the company takes its ability to pay dividends each month very seriously. And it has earned its trademark, with a highly impressive dividend track record that no other monthly dividend stock can match. Realty Income has paid 600 consecutive monthly dividends without interruption, a streak that goes back 50 years. The company has also increased its dividend 107 times since its public listing in 1994. Realty Income is on the list of Dividend Aristocrats, a group of just 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases.
The company currently pays a monthly dividend of $0.2335 per share, equating to just over $2.80 per share on an annualized basis. The stock yields approximately 4.9% right now, which is a strong yield especially in an environment of low interest rates. The S&P 500 Index, on average, yields less than 2% currently. Therefore, Realty Income is an attractive high-yield stock by comparison.
And, Realty Income has a secure dividend payout, which makes it an even more appealing dividend stock. The current analyst estimate is for Realty Income to generate FFO of $3.30 per share for 2020. Based on this, the stock has an expected payout ratio of 85%, which is on the high side generally, but REITs typically distribute the vast majority of FFO to shareholders.
Strong Expected Returns For This High-Quality REIT
We expect Realty Income to deliver strong total returns to shareholders in the coming years. This will be achieved through FFO-per-share growth, dividends, and an expanding stock valuation. We view the stock as undervalued based on its recent share price. First, we expect 4% annual FFO-per-share growth over the next five years, due to property acquisitions and rental increases. The current dividend yield of 4.9% will also meaningfully add to shareholder returns.
Lastly, an expanding valuation multiple could result in positive returns through a rising share price. We are slightly more optimistic than the prevailing analyst estimate right now. We currently expect Realty Income to generate adjusted FFO-per-share of $3.50 for 2020. Although this forecast may change given the uncertain outlook pertaining to the coronavirus, the stock trades for a P/FFO ratio of 16.5 based on this. Our fair value estimate is a P/FFO ratio of 18, which means valuation multiple expansion could boost annual returns by 1.8% per year through 2025.
The combination of expected FFO-per-share growth, the current dividend yield of 4.9% and the benefit of an expanding valuation multiple lead to total expected returns above 10% per year over the next five years. We view this as a highly attractive projected rate of return for a blue-chip dividend stock such as Realty Income. With a high yield, a long history of dividend growth and a safe dividend payout, Realty Income is a highly appealing stock for investors looking for dividend payments each month.