I aim to achieve financial independence by generating sufficient passive income to cover my regular expenses. A key component of my strategy is investing in dividend stocks, particularly those that offer above-average yields and have the potential for consistent future growth. In my strategy page I illustrated my journey to financial independence applying multiple strategies – trading options and futures to generate income that can be reinvested into the dividend stocks.
 

Realty Income (NYSE: O) is a perfect match for this approach. As a real estate investment trust (REIT), it has an impressive history of increasing its monthly dividends over the years. The company recently announced its 126th dividend hike since it became publicly traded in 1994.

This REIT is well-positioned to continue growing its dividend, currently yielding nearly 6%, which is significantly above average. Consequently, I make it a priority to buy more shares whenever possible.

 

A Dependable and Growing Dividend

 

Realty Income boasts one of the strongest track records for dividend payments in the REIT sector. It has raised its dividend for 29 consecutive years, including an impressive 107 consecutive quarters. While the most recent increase was a modest 0.2% over the previous month, the dividend has risen by 2.9% over the past year and has grown at a compound annual rate of 4.3% since its IPO in 1994.

A key driver of Realty Income’s reliable and growing dividend is its high-quality real estate portfolio. The REIT owns a diverse array of properties leased to high-quality tenants in stable industries. These net leases require tenants to cover building insurance, property taxes, and maintenance, and often include an annual rental rate increase. This structure ensures that Realty Income’s existing portfolio generates highly predictable rental income, increasing by over 1% annually.

 

 

The company distributes less than 75% of its stable cash flow as dividends, providing a buffer while retaining cash to fund new income-generating investments. Additionally, Realty Income’s robust balance sheet offers further financial flexibility.

Realty Income projects it can internally fund enough new investments to grow its cash flow per share by 2% to 3% annually. Considering rent growth, higher interest rates, and uncollectable rent, the REIT expects to grow its cash flow per share by more than 2% annually. This sets a strong foundation for future dividend increases.

 

Significant Growth Potential

 

Realty Income has the potential to grow faster than 2% per year. The company aims for 4% to 5% annual growth in adjusted funds from operations (FFO) per share, aligning with its historical growth rate of around 5%.

This growth can be achieved through accretive acquisitions funded by external capital (issuing new shares and debt). Realty Income estimates it can increase its adjusted FFO per share by 0.5% annually for every $1 billion of accretive acquisitions. This suggests it needs to make $4 billion to $6 billion in acquisitions each year to achieve its growth targets. Given that the company has made at least $9 billion in acquisitions annually in recent years (including a $9.3 billion acquisition of Spirit Realty), this goal is feasible.

Realty Income has ample investment opportunities, with an estimated addressable market for net lease real estate of $5.4 trillion in the U.S. and $8.5 trillion in Europe. The company has expanded its market opportunity by entering new property verticals.

For example, in recent years, Realty Income has added gaming, data centers, new European countries, and credit investments to its portfolio. With ongoing corporate mergers and consolidation in the net lease REIT sector, Realty Income has a significant growth runway.

 

Income and Growth

 

 

Realty Income offers a high-yielding monthly dividend that is expected to continue growing as the company acquires more income-producing real estate. Combining its income stream (around 6% annually) with its growth rate (4% to 5% annually), the REIT has the potential to deliver double-digit total annualized returns over the long term. This compelling mix of income and growth is why I consistently purchase more shares whenever I can.