The stock market is unpredictable. While growth stocks can help you earn huge returns over time, dividend stocks provide a sense of stability and reliability amid market volatility. Although high dividend yields are appealing, companies that consistently pay and increase dividends over time provide a more stable source of passive income. Consistent dividends also exhibit the stability of their business operations.

One such dividend stock is Realty Income Corp. (O), a real estate investment trust (REIT) that has gained a reputation as an attractive dividend stock. What’s more, by increasing dividends for 25 consecutive years, the company is a part of the S&P 500 Dividend Aristocrats Index.

Realty Income stock has dipped 7% YTD, compared to the S&P 500 Index’s ($SPX) gain of 5.3%. Nonetheless, Wall Street seems to be optimistic about Realty Income stock. Let's look into why this could be a good dividend stock to buy now.

Understanding “The Monthly Dividend Company”

Realty Income has a unique business model that works by acquiring and leasing retail and commercial properties. The company then leases out these properties to tenants from various industries, ensuring a steady and reliable source of rental income.

The company's strength comes from its diverse tenant base, which includes convenience stores, drugstores, dollar stores, and even gyms. No single tenant accounts for a large portion of its rental revenue, which lowers the risk associated with industry-specific challenges. Its tenants include Walgreens (WBA), Sainsbury's, Tesco, CVS Pharmacy (CVS), and Wynn Resorts (WYNN), among others.

At the moment, Realty Income’s portfolio includes 13,282 commercial properties with long-term net lease agreements spanning 85 industries.

This diversification strengthens its ability to weather economic uncertainties and provide a consistent income stream for investors. It also enables the company to pay out monthly dividends of $0.2565 per share, earning it the label, "The Monthly Dividend Company."

Realty Income’s Fundamentals Are Strong

Realty Income signs long-term net lease agreements with tenants and earns rental income in exchange. These contracts also require tenants to pay maintenance costs, property taxes, and insurance, among other expenses. 

Furthermore, many of these leases include automatic rent increases, allowing Realty Income to profit from rising property values and inflation over time. This benefits investors, because it acts as an inflation hedge.

Another advantage is that Realty Income has long-term lease agreements with a weighted average lease term of approximately 9.7 years, allowing the company to generate consistent revenue.

In the third quarter, Realty Income’s revenue came in at $1.04 billion, an increase of 24.1% year-over-year. Earnings per share stood at $0.33, lower than $0.36 in the prior-year quarter. However, earnings exceeded consensus estimates.

As a REIT, Realty Income is obligated to give away 90% of its taxable income as dividends. In contrast to net income for non-REITs, AFFO, or adjusted funds from operations, determines how much money can be allocated to be paid out in dividends. Realty Income's AFFO increased to $721.4 million, or $1.02 per share, in the third quarter, up from $603.6 million, or $0.98 per share, in the year-ago quarter.

For the full year, management anticipates AFFO in the $3.98 to $4.01 per share range, representing a 1.5% to 2.3% increase. While not a significant increase, growing AFFO steadily will enable the company to continue paying dividends.

Is Realty Income’s Dividend Sustainable?

Realty Income has an attractive forward dividend yield of 5.7%, compared to the sector average of 4.4%. Aside from the yield, its consistency in dividend payments and rate hikes distinguishes it as a good dividend stock. In December, the company increased its monthly dividend to $0.2565 per share from $0.2560. This marked the 123rd dividend increase since the company went public in 1994.

The company's AFFO dividend payout ratio of 75.9% implies that dividend payments are sustainable, with the possibility of dividend increases. While revenue and AFFO continue to rise, the company is also aggressively investing in its expansion plans.

On Jan. 23, it completed the acquisition of Spirit Realty Capital, an all-stock transaction with an enterprise value of approximately $9.3 billion. Management expects the acquisition to "deliver over 2.5% accretion" to the company's AFFO per share, and added that the company is unlikely to need to raise any additional external capital to support this acquisition.

Prior to this, Realty Income spent approximately $950 million to acquire Bellagio Las Vegas. In total, the company invested $2.0 billion in 289 properties during the third quarter.

While the company's diverse operations provide a safety net, spending heavily in a challenging macroeconomic environment may strain its finances in the long run.

We'll learn more about Realty Income's plans for 2024 when it reports fourth-quarter and full-year results on Feb. 20. Analysts predict that the company will report a revenue increase of 14.7% to $3.7 billion for the full year 2023, while FFO (funds from operations) will rise 1.7%. Furthermore, in 2024, revenue and FFO are expected to increase by 14.7% and 3.4%, respectively.

What Does Wall Street Expect for Realty Income Stock?

Overall, Wall Street rates Realty Income stock as a “moderate buy.” Out of the 17 analysts that cover the stock, seven rate it a “strong buy,” one rates it a “moderate buy,” and nine rate it a “hold.” 

The mean target price for the stock is $62.80, which is 17.8% above current levels. 

The Bottom Line for Realty Income Stock

Realty Income's unique business model, diverse tenant base, long-term leases with built-in rent increases, and resilience during economic downturns make it a desirable choice for those seeking a consistent income stream. 

While no stock is risk-free, Realty Income's track record of monthly dividends and consistent hikes with an attractive yield reflects its commitment to return value to shareholders. This makes it a fantastic dividend stock for investors seeking steady growth and income in their portfolios.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.