Why I Keep Buying More Shares of This Amazing 5%-Yielding Dividend Stock

My long-term goal is to become financially independent. I plan to get there by growing my passive income to the point where it covers my regular expenses. That way, I won’t have the stress of needing to make an income to cover my living expenses.

I still have quite a way to go. However, I make steady progress toward my target by pouring more money into income-generating investments each month. I love to invest in high-quality dividend stocks with higher-yielding payouts that steadily increase because they should help me reach my goal faster. Realty Income (O 1.17%) certainly fits the bill, which is why I keep buying more shares every chance I get.

An amazing dividend stock

Realty Income embodies everything I seek in a dividend stock. The real estate investment trust (REIT) is the model of consistency. It has paid 652 consecutive monthly dividends throughout its history. It has increased its payment 127 times since going public, including in each of the last 30 consecutive years and the past 108 quarters in a row.

The REIT’s dividend currently yields around 5%. That’s well above average (the S&P 500 index’s dividend yield is currently less than 1.5%).

That high-yielding payout is on a very sustainable foundation. Realty Income generates more than enough cash flow to cover its payment. During the first half of this year, the REIT produced nearly $1.8 billion of adjusted funds from operations (FFO), which covered its $1.3 billion dividend outlay with almost $500 million to spare. The REIT used that excess cash to invest in additional income-producing commercial real estate.

Realty Income also has a very strong balance sheet. It’s one of only eight REITs in the S&P 500 with two A3/A- credit ratings or better, thanks to its lower leverage ratios and the quality of its portfolio.

The REIT’s conservative financial profile gives it the flexibility to continue expanding its real estate portfolio so that it can keep increasing its high-yielding dividend.

Multiple dividend growth drivers

Realty Income has grown its dividend at a 4.3% compound annual rate since going public, driven by a combination of rent growth and accretive acquisitions. Those catalysts will continue to drive its growth in the future.

The REIT signs long-term net leases with high-quality tenants. Those leases require that tenants cover all operating expenses, including routine maintenance, building insurance, and real estate taxes. Because of that, it generates very predictable rental income each year. Meanwhile, those leases feature escalation clauses that increase rents by an average of 1.5% each year.

Acquisitions are the company’s other growth driver. Thanks to its abundant post-dividend free cash flow, the REIT can internally fund a meaningful amount of acquisitions each year. It estimates that internally funded investments will add 2% to 3% annually to its adjusted funds from operations. After subtracting bad debt expense (about 0.4% annually) and the impact of refinancing debt in today’s higher interest rate environment (a 1% to 2% annual headwind), Realty Income can internally grow its adjusted FFO per share by about 2% each year.

Thanks to the company’s strong financial profile, it has abundant access to external funding to make additional accretive acquisitions. At its current cost of capital, the REIT estimates that it can deliver 0.5% of adjusted FFO-per-share growth for every $1 billion of externally funded investments it makes. It conservatively estimates it can add 2% to 3% to its FFO-per-share growth rate each year by making externally funded acquisitions ($4 billion to $6 billion annually).

That investment volume is well within reach. Realty Income made an average of more than $9 billion in acquisitions in each of the past four years, which includes single-property investments and mergers with VEREIT and Spirit Realty. Meanwhile, it has a massive investment opportunity set (a $5.9 trillion total addressable market in the U.S. and $8.5 trillion in Europe). The REIT routinely reviews over $50 billion of acquisition opportunities annually, selectively closing only the highest-quality accretive investments.

Add its internal growth rate with its external growth potential, and Realty Income should increase its adjusted FFO per share at a 4% to 5% annual rate. That could support a similar growth rate in its high-yielding dividend.

An exceptional income investment

Realty Income is the type of dividend stock I want to help anchor my passive income. It pays a very sustainable, high-yielding dividend that should continue to rise. That’s why I continue to add to my position, which I expect to keep doing in the coming years. It’s a core income position for me and one that I want to become an even more meaningful contributor in the future.