Readers hoping to buy Realty Income Corporation (NYSE:O) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 31st of July will not receive this dividend, which will be paid on the 15th of August.
Realty Income’s upcoming dividend is US$0.23 a share, following on from the last 12 months, when the company distributed a total of US$2.71 per share to shareholders. Last year’s total dividend payments show that Realty Income has a trailing yield of 3.9% on the current share price of $69.54. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 84% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth It could become a concern if earnings started to decline. While Realty Income seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don’t think this is great, we also don’t think it is unusual. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 83% of its free cash flow as dividends, which is within usual limits but will limit the company’s ability to lift the dividend if there’s no growth.
It’s positive to see that Realty Income’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see Realty Income’s earnings per share have risen 13% per annum over the last five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we’d wonder why management are not reinvesting more in the business.
Realty Income also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Realty Income has delivered an average of 4.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Should investors buy Realty Income for the upcoming dividend? It’s good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That’s why we’re glad to see Realty Income’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 84% and 83% respectively. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Realty Income today.
Ever wonder what the future holds for Realty Income? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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