Key Points
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Realty Income has delivered an average annualized total return of 13.6% since its public market listing in 1994.
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The REIT could deliver a total return of more than 10% annually in the future.
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Its recent private capital partnerships and data center investments pave the way for faster growth.
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Albert Einstein called compound interest the eighth wonder of the world, quipping, “He who understands it, earns it… he who doesn’t… pays it.” Investing in dividend-paying stocks is one way to capitalize on the wonders of compounding. Investors who reinvest their dividends in a company that grows its payout can earn enriching returns.
Realty Income (NYSE: O) prides itself on paying dependable, growing monthly dividends. Here’s a look at whether the real estate investment trust (REIT) can help you compound your investment into future riches.
A compounding machine
Realty Income has been a terrific dividend stock over the years. The REIT has increased its monthly payment 135 times since its public market listing in 1994, including the past 115 consecutive quarters. It has grown its dividend at a 4.1% compound annual rate during that three-decade period.
Investors who reinvested their dividends have earned a robust 13.6% compound annual return from the REIT since 1994. To put that return into perspective, an investor who bought $25,000 of Realty Income stock in 1994 would have seen that initial investment grow to nearly $1.2 million.
Can Realty Income continue to compound?
While Realty Income has clearly made investors rich through compounding since it went public, that past performance doesn’t guarantee it will deliver similar results in the future. Here’s a realistic look at how the REIT might perform over the next several decades.
Realty Income currently pays a dividend yield of more than 5%. That high-yielding payout provides a very sustainable base return. Realty Income generates very stable income from its diversified portfolio of net-leased real estate. Meanwhile, the REIT has a conservative dividend payout ratio (around 70%) and one of the strongest balance sheets in the sector. That gives it the financial strength to continue investing in growing its portfolio of income-producing real estate, which is the key to increasing its dividend.
The REIT has historically grown its adjusted funds from operations (AFFO) per share at a 5% annual rate through a combination of rent growth and new investments, supporting its 4.1% compound annual dividend growth rate. Realty Income has been positioning itself to deliver higher future growth through a series of strategic initiatives. It has formed several strategic private capital partnerships that should accelerate AFFO per share growth through capital-light revenue, such as management fee income. The REIT is also forming strategic partnerships to capitalize on the large, fast-growing data center segment. These initiatives could enable the REIT to grow its AFFO at a mid-to-high single-digit rate in the future.
With a 5%+ current yield and the potential to deliver 5%+ annual AFFO per share growth in the future, Realty Income could produce a more than 10% annualized total return (assuming no change in its valuation multiple). That level of return could certainly make you rich through long-term compounding. For example, if you invested $5,000 into Realty Income each year and it delivered an average annual return of 11%, the REIT could grow your investment to over $1.1 million in 30 years.
An enriching dividend stock
Realty Income has made long-term investors rich by steadily growing its monthly dividend. The REIT is in a strong position to continue compounding shareholder value going forward, driven by its new strategic capital partnerships and data center investments. That makes it a great dividend stock to buy and hold long-term, as it should steadily create more wealth for shareholders.
Should you buy stock in Realty Income right now?
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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
