Why Realty Income Belongs on Your Radar

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Think all retail is risky? Think again. In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why retail real estate investment trust Realty Income (NYSE: O) is a low-risk way to bring predictable growth and income to your stock portfolio.

A full transcript follows the video.

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This video was recorded on Feb. 11, 2019.

Jason Moser: "What do you think about Realty Income, ticker O, for a new investor? Is it a good idea?"

Matt Frankel: Well, it's my single largest stock position.

Moser: So you're saying it's a good idea?

Frankel: So I'm saying it's a good idea. Here's why. If you haven't heard of this stock -- like you said, ticker symbol O, Realty Income -- it's a real estate investment trust that specializes in freestanding retail properties. A lot of investors are hesitant to get involved with anything involving physical retail, but you shouldn't be in this case. Here's two main reasons why. One: Realty Income focuses on businesses that are not threatened by e-commerce or recessions. Think of discount-oriented retailers like warehouse clubs like Costco, Sam's Club, things like that. Also non-discretionary businesses, things that people need like pharmacies, gas stations. And, businesses that have a service component, like a movie theater or a restaurant, things that people have to physically go to that don't have an e-commerce equivalent. That's No. 1.

No. 2 is their lease structure. They're on what are called triple net leases, which is a long-term lease structure. Realty Income's typical tenant signs a 15-year lease or more. Minimal turnover. The triple net lease means that they're responsible for paying property taxes, building insurance, maintenance expenses. It pretty much shifts all of the variable costs of property ownership to the tenant. Rent naturally goes up every year, it's called an escalator.

It's a perfect business model for consistent, steady income. Realty Income pays a great dividend, right around 4% right now. They've increased it over 90 times since it's been listed in 1994 on the NYSE. They pay monthly dividends. They're coming up on their 500th dividend payment, consecutive. It's just like clockwork. Very low-risk business. Valuation's a little high, but you get what you pay for. I don't see their streak of dividend increases ending anytime soon. It's my dividend stock that I plan on holding until I retire.

Moser: We're very transparent about our holdings and we try to make sure people understand that the companies we talk about that we like, a lot of times, we own those businesses because we feel that they are good investments. We're not trying to push anybody in any direction where they shouldn't feel comfortable. Matt, you have a lot of experience in that real estate industry. Obviously, you're going to be helping with our new real estate service here coming up, too. Take that with a grain of salt there, too. I'm putting that ticker at the top of my watch list. I don't know that I have any exposure to REITs, but now that I know this is your biggest holding, I'm going to have to at least keep it on my radar.

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Realty Income. The Motley Fool recommends COST. The Motley Fool has a disclosure policy.