Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Realty Income’s Dividend Growth Score of 17 suggests that the company’s dividend growth potential is below average.
Despite management’s solid track record of paying dividends for 47 years and increasing the dividend 85 times since 1994, dividend growth has averaged around 4-5% per year over most time periods.
Source: Simply Safe Dividends
While that is not bad growth, it is below the S&P 500’s long-term historical dividend growth rate.
Regardless, Realty Income’s commitment to its dividend is unwavering, and I expect the company to eventually join the dividend aristocrats list once it is qualified to do so in the next five years.
Going forward, I expect Realty Income’s dividend growth to average 3-5% per year – roughly in line with earnings growth.
REITs pay out almost all of their income as a dividend and are generally mature, capital-intensive businesses, so dividend growth is often relatively low but reliable.
Valuation
O’s stock trades at approximately 20 times estimated 2016 AFFO per share and has a dividend yield of 4.0%, which is lower than its five-year average dividend yield of 4.9%.
Going forward, I expect Realty Income’s AFFO per share growth to average 4-6% per year. The company’s organic sales only grow 1-2% per year, driven by rent increases, so it will need to continue tapping external financing and acquiring new properties to grow AFFO per share beyond that rate.
Under my AFFO per share growth assumptions, Realty Income’s stock appears to offer total return potential of 8-10% per year.
Realty Income Corp (NYSE:O) has performed very well recently, returning over 36% over the past year alone. Considering the stock’s relatively high cash flow multiple and relatively low dividend yield, I would prefer to wait for a better entry point – perhaps caused by Fed-induced volatility across higher-yielding stocks if additional interest rate hikes are announced later this year.
REITs can be one of the best stock sectors for dividend income and Realty Income is certainly a high quality business, but that doesn’t mean the stock is an attractively priced investment today.
Conclusion
Realty Income is arguably the most reliable monthly dividend stock in the market and certainly possesses many of the qualities I look for in a blue-chip dividend stock.
I like the company’s disciplined approach to acquiring properties, focus on leasing to high quality tenants, conservative capital structure, and thorough diversification by tenant, industry, and geography.
Realty Income should continue to enjoy consistent, albeit mild, dividend growth for many years to come. On a pullback, the stock will look really interesting as a potential investment opportunity, especially for those living off dividends in retirement.
Disclosure: None
