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Realty Income: 82 Dividend Increases & Counting

Real estate investment trusts (REITs) have been a great way for investors to score some wonderful total returns over the last few decades. Designed as a way for average Joes to invest in commercial real estate, REITs are required to payout 90% of their operating earnings as big dividends back to shareholders. Those larger-than-average yields plus capital appreciation have helped the sector outperform regular stocks since their inception in 1994.

With some REITs, there’s more of a focus on dividends than others—case in point, Realty Income Corp (O ). Billed as “The Monthly Dividend Company,” Realty Income remains one of the best choices for investors looking for a steady paycheck, in either retirement or dividend growth scenario. The chance to buy the solid REIT stalwart could be now.

All About Triple Net Leases

O’s major distinction and its nickname come from its monthly dividend—a dividend that it has paid without interruption since its IPO back in 1994. That’s a whopping 545 straight months’ worth of payouts. Perhaps more importantly, it’s managed to increase that monthly payout 82 times and counting since launching. All of this has helped the company average a 16.6% total return annually over the last 20 years.

The key to that amazing dividend growth and stock performance comes down to Realty Income’s top-notch portfolio of properties. To start with, it’s huge.

Currently, O owns a staggering 4473 different properties, which makes it one of the largest real estate owners in the entire world. But unlike rival REITs, Realty Income doesn’t focus on shopping centers, office towers or apartment buildings. The company has focused on the niche of freestanding retail, food, service and other real estate buildings. These are the types of buildings that dot the suburban landscape all across America. Top tenants across its portfolio include Walgreens (WAB ), FedEx (FDX ) and Dollar Tree (DLTR).

The next positive piece to O’s portfolio is how these single freestanding properties are leased. Realty Income signs nothing but net leased buildings. At their very basic, a net lease requires the tenant to pay not just rent but also some or all of the property expenses that normally would be paid by the property owner. A triple net lease is one in which the tenant pays rent, plus taxes, insurance and maintenance costs.

As a result, net leased buildings require little to no management and only minimal oversight on the part of the property owner due to how their leases are structured. Better still, these sorts of leases result in better cap rates, returns and cash flows for the property owners. And since most net leases are for long terms—15 or so years—Realty Income just sits back and collects the cash flows.

And Those Cash Flows Are Rising

Realty Income’s history of dividend increases and smart portfolio management works and will continue to work into the New Year. O expects that funds from operations (FFO)—which is a REIT metric that directly translates into dividends paid—should grow by 2.7% to 5.3% in 2016. However, O could surprise on that number and actually do better. It’s historically done just that and has realized better than expected FFO jumps pretty much yearly.

Part of the reason is that management has been very smart on the acquisition front the last few years. Typically, Realty Income has sought out and entered into sale-leaseback transactions that directly and instantly add to cash flows. While O has guided lower on future acquisitions in 2016, it has typically surprised to the upside with the pace of deals and purchases.

Ultimately, O’s current 4.5% yield will continue to rise in 2016 as FFO and cash flows are fully able to support increases. Add in any extra boosts from acquisitions and you’re looking at a real dividend machine.

Buying Some O

With that in mind, investors may want to add some O to their portfolio. Shares of the REIT have been pretty resilient in the market’s recent sell-off as the protection of its large portfolio and dividend provides a decent safety net. O has bounced back from the recent REIT sell-off when the Fed announced that it was raising rates.

This means that today’s prices may be as good as it gets for the net lease stalwart—at least for a while anyway. Investor’s looking to snap up shares of the firm may want to do so now and prepare to buy more if there is some sort of sector specific panic.

At the end of the day, Realty Income and its huge portfolio of single-standing net leased buildings could be one of the best positions in a dividend portfolio. Based on its history, investors should expect a long time of outperformance and income in their future from the stock.