Dividend Increase | Realty Income (O)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Realty Income for yet another dividend increase!
There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On September 18th the Board of Directors at Realty Income (O) announced another increase to their monthly dividend.  The dividend was increased from $0.2265 per share up to $0.227 per share.  That works out to a 0.22% raise.  Realty Income is a Dividend Champion with 26 consecutive years of dividend increases.  Shares currently yield 3.61% based on the new annualized payout.

Realty Income is a bit different from most dividend growth stocks.  For starters they don't pay quarterly dividends; rather they pay them out monthly.  They also typically announce one larger increase in January and then 3-4 smaller increases throughout each year.  Compared to the year ago payout the new monthly dividend represents a 2.95% increase.

Since I own 102.726 shares of Realty Income in my FI Portfolio this raise increased my forward 12-month dividends by $0.62.  This is the 31st dividend increase I've received from Realty Income since initiating a position in July 2013.  Cumulatively, the organic dividend growth from O has totaled a whopping 25.0% over that time.  According to US Inflation Calculator the cumulative rate of inflation over that same time is 10.1%.  

A full screen version of this chart can be found here.

Realty Income won't be confused as a company with a rapidly growing dividend; however, that's more than made up for by its normally high initial yield and its steady 3-6% annual dividend growth.  

Of the 21 rolling 5-year periods of Realty Income's dividend growth streak, annualized dividend growth has ranged from 2.6% to 28.3%.  The average annualized dividend growth has come to 6.0% with a median of 5.0%.

Of the 16 rolling 10-year periods of the streak, annualized dividend growth has ranged from 4.0% to 15.3% with an average of 5.6% and a median of 5.0%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1994 can be found in the following chart.  

A full screen version of this chart can be found here.

*2019's dividend assumes the new monthly payout of $0.227 per share is maintained for the rest of 2019.

One quick valuation metric that I've started to incorporate is called dividend yield theory.  The idea behind DYT is all about reversion to the mean for the dividend yield compared to the 5 year moving average.  I consider shares to be in the fair value range when the forward dividend yield is +/- 10% of the 5 year moving average.  Under and over valued scenarios are when the yield is between 10-20% higher or lower, respectively, than the  5 year moving average.  I consider greater than 20% deviations from the 5 year moving average to potentially represent significant over or under valued scenarios.

*A full screen version of this chart can be found here. 

Realty Income's 5-year moving average dividend yield is 4.39%.  In order for Realty Income to offer the average dividend yield the share price would need to be $62 or roughly 18% lower than current levels.  This suggests that Realty Income is overvalued at this time.

Realty Income's current yield is in the 0.90% percentile.  In other words since Realty Income declared its first dividend payment as a publicly traded company the yield has been higher 99.1% of the time. 

The yield that Realty Income shares have offered has been in a very noticeable downtrend over the last 25 years which I believe 2 reasons are to blame.  The first is a good reason which is the high quality and stability of the business and management.  The second is due to persistently low interest rates, especially over the last decade, has led investors to bid up anything with yield.  I believe that's skewed the "normal" valuations for a company such as Realty Income.  Should the interest rate environment change equities such as Realty Income could experience dramatic price fluctuations.

Wrap Up

This raise increased my forward dividends by $0.62 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.93% this raise is like I invested an extra $21 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

Thus far in 2019 I've received 37 total increases from 32 of the 54 companies in my FI Portfolio.  Combined those increases have raised my forward 12-month dividends by $255.51.

My FI Portfolio's forward-12 month dividends increased to $7,440.24.  Including my FolioFirst portfolio's forward dividends of $100.11 brings my total taxable accounts dividends to $7,540.35.  My Roth IRA's forward 12-month dividends remain at $616.78 with my Rollover IRA remaining at $2,200.28.

Do you own shares of Realty Income and do you think they can maintain 4-6% annual dividend growth over the long term?

Please share your thoughts below.