Realty Income: An Anchor in Volatile Markets

Key Points

• Realty Income's business model generates predictable cash flow and supports consistent dividend payments.
• The company's track record of consecutive monthly dividends and regular dividend increases demonstrates a strong commitment to shareholder returns.
• Realty Income's diversification across industries, geographies, and a vast number of properties helps it stand out in a crowded and dynamic real estate industry.

Investors are anxious due to the unpredictability of the current stock market environment. Factors such as economic uncertainty, inflation, and geopolitical tensions cause volatility and rapid price swings. While some traders attempt to profit from these fluctuations, the inherent risk has led many investors to prioritize capital preservation and stable income. This focus on long-term financial security contrasts with the pursuit of high-risk, high-reward, short-term gains. 

This raises an important question: Where can investors find relative stability in a volatile market? What investments can act as an "anchor" for their portfolios, providing a degree of protection against the market's unpredictable currents? Realty Income NYSE: O, often referred to by its trademarked tagline, "The Monthly Dividend Company," presents a compelling answer to this question.

Realty Income: Built for Stability, Designed for Dividends

Real Estate Investment Trust (REIT) Realty Income is a member of the S&P 500 and the S&P 500 Dividend Aristocrats Index, and the trust owns and operates income-producing real estate. The company is not a typical high-growth stock but stands out in the REIT space due to its focus, size, and history.

Inclusion in the Dividend Aristocrats Index demonstrates Realty Income's commitment to shareholder returns and a consistent track record of quality, scale, and dividend growth, as the index only includes companies that have increased their dividends for at least 25 consecutive years.

Realty Income's stability is based on its triple-net lease business model, which makes it a resilient company. Through triple-net leases, the tenants are responsible for rent and most property expenses, including real estate taxes, building insurance, and maintenance. This structure creates a predictable cash flow and significantly reduces Realty Income's operating expenses. Additionally, these leases are long-term, with a weighted average remaining lease term of approximately 9.3 years, which gives Realty Income rental income visibility far into the future.

Realty Income's tenant base and lease structure are key strengths. The company's portfolio is diversified across more than 15,450 properties in 50 U.S. states, the U.K., and six other European countries, mitigating risk associated with regional economic downturns. Realty Income prioritizes "essential" or "necessity-based" retail tenants, such as drug stores, convenience stores, grocery stores, and dollar stores.

The businesses of these tenants are less susceptible to economic downturns and the resulting impact on their ability to pay rent, as they provide necessary goods and services, unlike luxury retailers or entertainment venues.

Realty Income, aptly named "The Monthly Dividend Company", has an impressive history of 656 consecutive monthly dividends over five decades. Since its 1994 NYSE listing, the company has raised its dividend 129 times, including 110 consecutive quarterly increases.

In February 2025, Realty Income announced a monthly dividend increase to $0.268 per share, a 1.5% month-over-month and a 4.5% year-over-year increase. This equates to an annualized dividend of $3.216 per share, yielding 5.67% based on recent closing prices. This consistent dividend growth is a key attraction for income-seeking investors.

Realty Income's Role: Anchoring Your Portfolio

In a well-diversified investment portfolio, Realty Income can serve as a valuable "anchor" or "ballast," providing stability and counteracting the volatility of other, more growth-oriented holdings. While growth stocks, such as those in the technology or energy sectors, offer the potential for significant capital appreciation, they also typically exhibit higher volatility, meaning their prices can fluctuate dramatically. Realty Income, on the other hand, tends to demonstrate much lower volatility. 

Realty Income also provides a consistent monthly dividend stream, which is especially valuable during market downturns. This dependable income stream can offer psychological comfort and tangible returns when growth stock prices are falling.  Including Realty Income in a balanced portfolio alongside growth-oriented investments can help reduce overall beta and volatility. Thus, Realty Income acts as a defensive asset,  providing a reassuring signal and stability during periods of market stress.

Realty Income's Financial Strength

While the dividend is a major attraction, it's essential to examine the underlying financial health of Realty Income. The most critical metrics for Real Estate Investment Trusts are Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO). These metrics are better indicators of a REIT's ability to pay dividends than traditional net income or earnings per share (EPS) because they exclude depreciation. This non-cash expense significantly impacts net income for real estate companies.

Realty Income reported strong financial results for the fourth quarter and full year of 2024, with AFFO per share of $1.05 and $4.19, respectively. These results comfortably cover the company's dividend payments, demonstrating its ability to sustain and potentially grow its distributions.

The company's occupancy rate remains high at 98.7% as of December 31, 2024, and it continues to expand its portfolio with approximately $3.9 billion invested in property acquisitions during 2024. For 2025, management's guidance projects AFFO per share between $4.22 and $4.28, indicating continued growth. 

Balancing Stability and Risk

It is important to remember that no stock is entirely risk-free, and that includes Realty Income, despite its reputation as a "safety net" investment. REITs are particularly susceptible to changes in interest rates. When interest rates rise, the dividends offered by REITs can become less appealing compared to bonds, which would provide higher yields. Additionally, increased interest rates lead to higher borrowing costs for REITs, which can negatively impact their profitability. However, Realty Income has a long and successful track record of navigating changing interest rate environments.

Anchoring a Portfolio Through Volatility

Realty Income offers investors a compelling option to reduce portfolio volatility and generate dependable income due to its stable business model, focus on essential retail tenants, consistent monthly dividends, and strong financial position. It acts as a "safety net” against market turbulence, offering a more predictable return stream compared to more volatile growth stocks.

However, it's crucial to remember that "safety net" is a relative term. Realty Income is not a bond, and its stock price can still fluctuate. It's a tool for managing risk, not eliminating it. Realty Income can be a valuable "anchor" in a diversified portfolio for long-term, income-focused investors, providing stability and consistent returns, which is particularly valuable in today's uncertain market environment.