Real Estate Investment Trusts, or REITs, can serve as a convenient way for regular investors to profit from rental real estate while also generating income for those seeking to live off dividends in retirement.

Realty Income (O) has become famous for its generous, secure, and steadily growing dividends (23 straight years of increases and counting), which are paid monthly and helped the company make our list of the best high dividend stocks here.

Let’s take a closer look at what makes Realty Income such a safe, high-yield income investment, and as importantly, whether or not today could be a reasonable time to add the stock to a diversified high-yield portfolio.

Business Overview

Founded in 1969 in Escondido, California, and going public in 1994, Realty Income is America’s largest single tenant property, triple net lease REIT.

At the end of Q2 2017, the company owned 5,028 properties in 49 states, Washington DC, and Puerto Rico, which are leased out to 250 tenants operating in 47 industries.

Source: Realty Income Investor Presentation

In recent years the REIT has begun diversifying into non-retail properties, including offices, industrial warehouses, and farm land. However, retail properties still generate approximately 80% of total rental revenue.

Business Analysis

Since 1994, Realty Income has grown its real estate assets (at cost) from $451 million to $12.2 billion; expanded the number of industries served by its portfolio from 5 to 47; increased its number of commercial tenants from 23 to 250; and boosted its annual revenue from $49 million to more than $1 billion.

Not surprisingly, Realty Income has several great characteristics that have made it an excellent long-term growth story.

Operating as a triple net lease REIT is the company’s first advantage because its tenants pay all maintenance, taxes, and insurance costs.

This means that Realty Income just sits back and collects rental income, which is under very long-term (15 years) fixed rate contracts, with annual rental increases built in (usually about 1% to 1.5%).

This results in not only very high gross margins and overall profitability, including an adjusted funds from operations (REIT equivalent to free cash flow) margin of 68.5%, but also very predictable cash flow which makes for highly stable and growing dividends.

Another competitive advantage the REIT has is a very experienced management team, led by CEO John Case, who, prior to taking the top spot at Realty Income, was a New York real estate investment banker for 20 years.

The company leverages its relationships with tenants, property developers, brokers, investment banks, and other parties to source acquisition opportunities with strong initial cap rates and built-in rent growth.

Realty Income’s management team has a great track record of growing the REIT through an aggressive but highly disciplined acquisitions of new properties, each one purchased at accretive prices (so that AFFO per share grows over time) and with long-term rental leases locked in with some of America’s largest and most financially sound retailers.

This fast growth in its property portfolio has resulted in one of the industry’s most diversified tenant bases, and more importantly, one that has little exposure to the current struggles in the retail market, which has seen a large number of bankruptcies in 2017.

As you can see, the majority of retail bankruptcies have been in apparel, sportings and electronics chains.

However, not all retailers are equally distressed. In fact, many are thriving.

Source: Hoya Capital Real Estate

Over the years, Realty Income has done a great job of evolving with the retail industry and moving its tenant base away from troubled industries and towards those that are still doing well and largely resistant to the threat posed by e-commerce.

You can see that Realty Income’s largest tenant mix has shifted over the past decade to favor less cyclical industries and tenants with strong investment-grade credit ratings.

And because management is constantly growing the company’s property and tenant base, Realty Income’s rent has become more diversified over time and much safer, focusing even more on e-commerce resistant sectors such as services, convenience stores, and non-discretionary outlets such as grocery stores.

In fact, none of Realty Income’s top 20 tenants are currently distressed, and the portfolio’s weighted average EBITDAR coverage ratio (cash flow/rental payments) is a strong 2.8, among the best in the industry.