Monday, August 4, 2008
Realty Income Corporation engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. As of December 31, 2007, it owned 2270 retail properties located in 49 states, covering approximately 18.5 million square feet of leasable space.
The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 14 consecutive years. From 1998 up until June 30 2008 this dividend growth stock has delivered an annual average total return of 14.90 % to its shareholders.
At the same time company has managed to deliver a 5.50% average annual increase in its FFO since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.
The ROE has been decreasing from its 2001 highs around 13% to about 9% in 2007.
Annual dividend payments have increased over the past 10 years by an average of 5.1% annually, which is slightly lower than the growth in FFO. A 5% growth in dividends translates into the dividend payment doubling almost every 14 years. If we look at historical data, going as far back as 1994, O will have managed to double its 1994 monthly dividend payment of $0.0775/share by 2009.
Realty Income is one of the few companies which make monthly dividend payments to shareholders. The company is so proud of its ability to raise dividends several times per year, that it calls itself the Monthly Dividend Company.
If we invested $100,000 in O on December 31, 1997 we would have bought 9465 shares (adjusted for a 2:1 split in 2005). In January 1998 your monthly dividend check would have been for $757. If you kept reinvesting the dividends though instead of spending them, your monthly dividend income would have risen to $2774 by June 2008. For a period of 10 years, your monthly dividend payment would have increased by 72 %. If you reinvested it though and took advantage of the monthly compounding effect, your quarterly dividend income would have increased by 266%.
The payout from funds from operations has remained at the 80%-87% range for the majority of our study period. One of the reasons why I wasn’t enthusiastic about the stock in february was because of this high payout. Do not repeat the same mistake as me however – In order to maintain their tax status as a REIT for federal income tax purposes, they generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.
One potential risk for the company is if it is unable to meet its financing needs from debt markets. I believe that we have seen most of the bad news in the financial markets. Since O managed to do just fine during the financial crisis that started last summer, I believe that it should do well in the future as well.
Another potential risk could be that the softening economy could have an adverse effect on some retailers and restaurants, which occupy O’s buildings. The vacancy ratio is about 96.8% as of July 28 2008, versus 98.6% as of June 30, 2007.
Overall I think that Realty Income (O) is another dividend stock that should be in every long term dividend investor’s portfolio. It is nice to have another asset class in your portfolio in order to achieve diversification.
I am a big fan of Warren Buffett , who is the best investor who ever lived. I have studied everything about the Oracle of Omaha that I coul...
I have spent the last year, learning as much as possible about Warren Buffett and his right hand man Charlie Munger . There is plenty of in...
In the past week, I have dipped into my savings pool, and have also dipped into my margin by buying more Target (TGT). I was also thinking ...
There were many companies that increased dividends in the past week. I skimmed the list, and narrowed it down by eliminating any company yi...
Back in September, I started making contributions for my Roth IRA. I bought shares the following ten companies in September , these nine in ...
My journey to becoming a dividend growth investor was a very long and arduous one. I have been following the stock market for years, but did...
I like learning from super investors of the world. When I think about super investors, the first thought that comes to mind is Warren Buffet...
As part of my process for uncovering undiscovered dividend gems , I focus on the list of companies that have increased their dividends. I us...
Dividend growth investing is a strategy that focuses on companies which regularly raise dividends. The strategy focuses on growth in divide...
Investors are always told to diversify. Diversification is the tool to protect investors from the unknown risks at the time of purchase. In ...