With June’s salary in the bank, it’s time to start thinking about stocks to buy in July. And with interest rates continuing to move higher, I’m seeing opportunities in dividend shares.
There’s a stock in my portfolio that I see as the ultimate passive income investment. It pays dividends every month and has increased its payments every quarter for the last 25 years.
The business
The stock is Realty Income (NYSE:O). The company is a US real estate investment trust (REIT) and its shares trade on the New York Stock Exchange.
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The business makes its money by owning and leasing retail properties to tenants. And each month it distributes 90% of the rental income it generates to shareholders in the form of dividends.
What differentiates Realty Income from other REITs is its focus on high-quality tenants. The big advantage of this is it makes the risk of missed rent payments very low.
Strong businesses are able to pay their rent even in an economic downturn. And this gives the company a degree of stability and predictability other real estate stocks can’t count on.
This stability has been a benefit to shareholders. For the last 25 years, Realty Income has consistently increased its dividends to shareholders every three months.
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Growth risks
This stability comes at a cost, though. Concentrating on high-quality tenants makes growing the business a challenge.
Companies with strong credit ratings are desirable tenants. This makes them difficult to negotiate with and limits Realty Income’s ability to raise rents.
As a result, the company has to rely on acquisitions and disposals in order to maintain growth. This, however, brings challenges of its own.
Acquiring properties with interest rates rising becomes more expensive. As a REIT, Realty Income has to pay out the cash it generates, meaning it often needs debt to finance acquisitions.
As a result the most recent dividend increase was pretty minimal – a 2% increase. At the moment, that’s comfortably below the level of inflation.
The dividend
Despite the clear and present risk for the company in terms of future growth, I think this is a great dividend stock to buy. I added to my investment in the company in June and intend to do so again in July.
Right now, the stock is down almost 6% since the start of the year. And that means the dividend yield has crept up to 5%.
Even without substantial growth, I see 5% as a passive income return that makes the stock worth serious consideration. It’s also worth noting the dividend is paid monthly, increasing the compound rate.
Overall, I think Realty Income is the ultimate passive income stock – all the company does is make money and distribute it to shareholders. And it looks set to do this for a long time to come.
