Undervalued by 27%, This Monthly Dividend Stock Is a Buy

Realty Income is unusual in that it pays a monthly dividend—it even calls itself “The Monthly Dividend Company.” But that’s not the only selling point for this REIT today. For starters, Realty Income has a history of increasing its dividend over time. In fact, it qualifies as a dividend aristocrat, which means it has increased its dividend in each of the past 25 years or more. It’s also the largest triple-net REIT in the US, with the majority of its retail clients focused on defensive segments. Most importantly, though, Realty Income looks very underpriced, trading 27% below Morningstar’s fair value estimate. It appears on our list of The Best REITs to Buy and is one of our 3 Dividend Stocks for May 2025.

Realty Income has over 15,600 properties that mainly house retail tenants with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant; it requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long-term, frequently 15 years with additional extension options, which provides a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns.

Key Morningstar Metrics for Realty Income

• Fair Value Estimate: $75
• Star Rating: 5 Stars
• Economic Moat Rating: None
• Uncertainty Rating: Low

Economic Moat Rating

We don’t believe Realty Income has a moat. While its portfolio contains many healthy tenants, the company does not benefit from moat sources, such as efficient scale or network effect, that we attribute to some retail property owners. Realty Income’s annual rent escalators are only around 1%, and with long-term leases over 15 years with multiple extensions and total re-leasing spreads averaging below 5% over the past few years, the company sees very low internal growth. Instead, it must rely on acquiring new properties to increase cash flow. Given that it has generally acquired properties at low- to high-6% cap rates, the combined returns from internal and external growth do not exceed our estimated weighted average cost of capital.

Read more about Realty Income’s moat rating.

Fair Value Estimate for Realty Income Stock

Our fair value estimate implies a 5.8% cap rate on our forward four-quarter net operating income forecast, an 18 times multiple on our forward four-quarter funds from operations estimate, and a 4.3% dividend yield based on a $3.20 annualized payout. Annual rent escalators that average around 1% lead to same-store net operating income growth averaging 1.5% across our 10-year forecast. We believe that Realty Income will continue to acquire new assets to drive growth, though the volume will decline from $4 billion in 2025 to $1.2 billion by the terminal year. The company will also selectively dispose of assets to partially fund its external growth, though that amount will be limited to just $100 million-$200 million a year.

Read more about Realty Income’s fair value estimate.

Risk and Uncertainty

About half of Realty Income’s tenants are not investment-grade. Approximately 40% of its net operating income is still concentrated in its top 20 tenants, and 4 tenants represent more than 3% of its NOI, so issues at any of these top tenants could negatively affect revenue. There is nothing unique about Realty Income’s properties that can’t be recreated by other developers, and barriers to entry are very low. Reality Income’s dependence on acquisitions to drive growth makes it subject to changes in the private markets and capital markets, as well as competition for assets. And to fund its acquisitions, Realty Income depends on regular debt and equity issuances.

Read more about Realty Income’s risk and uncertainty.

Realty Income Bulls Say

• Realty Income provides a reliable, albeit slow-growing, monthly dividend built on a steady-performing portfolio through various market conditions.
• With reasonable leverage and ample liquidity, Realty Income should have the financial flexibility to take advantage of any attractive investment opportunities that arise.
• Realty Income’s operating history, defined underwriting criteria, and expanded portfolio transparency should give shareholders comfort while maintaining management accountability.

Realty Income Bears Say

• It will take an increasingly greater volume of attractive risk-adjusted acquisitions to create meaningful shareholder value growth, possibly pushing Realty Income to take more risk as competition increases for its traditionally targeted assets.
• Realty Income’s long-term leases, which exhibit minimal built-in rent growth, are particularly susceptible to rising interest rates and inflation.
• Rising interest rates reduce the spread between acquisition cap rates and financing costs, sapping management of its ability to create value through continued external growth.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of May 14, 2025.