Monday, August 4, 2008

Realty Income (O) Dividend Analisys

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.

Disclosure: I own shares of O

Relevant Articles:


  1. I see you used a stock chart, but you should consider using the embeddable charts Wikinvest just came out with. They are interactive and are really pretty cool.

  2. DGI: O is a fun stock. I love their annual reports. Several years ago their annual report was a board game. As an accountant, I loved the jabs made by the cartoon charters toward accountants such as "only people wearing a green visor will be able to understand this section" at the beginning of the footnotes.

    Unfortunately, I loaned that report out and never got it back.

    Best Wishes,

  3. This is an excellent overview of Realty Income. My only quibble with the company is that 18.8% of the 2008 distributions made to common stockholders were classified as a return of capital for federal income tax purposes.

    In other words, Realty Income distributed more than the amount necessary to achieve the full taxation benefit available to it as a REIT.

    Realty Income's preference for exceeding its REIT distribution requirements has grown over time:

    2006: O's cash distributions totaled $139.1 million, or approximately 113.3% of its estimated REIT taxable income of $122.8 million. [source: Realty Income 2006 10-K]

    2007: O's cash distributions totaled $182.2 million, or approximately 113.6% of its estimated REIT taxable income of $160.4 million. [source: Realty Income 2007 10-K]

    2008: O's cash distributions totaled $193.9 million, or approximately 122.7% of its estimated REIT taxable income of $158.0 million. [source: Realty Income 2008 10-K]

    Instead of retaining the excess capital for share repurchases or strategic activities that provide a return ON investment, Realty Income chooses to provide shareholder dividends that are, in part, a return OF shareholder investment.

    However, I still agree with the long case for Realty Income. The company's low cost of capital makes the "overdistribution" of taxable income a minor issue.

  4. Thank you for the excellent blog, it's been a great source for me to learn the dividend ropes!

    Has your analysis on O shifted in the current climate? I've been seeing some criticism of O in the financial media and ideas about shorting it.

    I'm a young investor just starting my portfolio, wondering if now is the right time for O.

  5. You don't do yourself a lot of favors in an article about a REIT when you admit that

    -you didn't know the REIT payout from FFO tax laws

    -you thought that in August of 2008that the worst of the economic downturn was behind us.

    And on a side note, while it's fun to say, "if you had invested $100,000 on such and such a date"......that isn't much of an option for the average retail investor.

    All that being said, I do love O :)

  6. I would be posting an analysis of Realty Income by Mid January 2010.

    Best Regards,



Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts