Market

Realty Income (O 1.28%) isn’t an exciting company, but it has historically proven to be an attractive and reliable dividend stock. If you are looking to build a passive income stream to support yourself in retirement, it should probably be on your radar. And with the dividend yield near 10-year highs at 5.8%, now is a good time to take a closer look. Realty Income’s continued expansion in a key growth market is one of the big reasons to like it.

What does Realty Income do?

Realty Income is a real estate investment trust (REIT) that owns single-tenant properties. Most of its assets are retail, but it also has exposure to industrial properties and some more unique areas like vineyards and casinos.

The one theme that runs across all of its portfolio, however, is the use of net leases. Net leases require tenants to pay for most property-level operating costs. That keeps expenses low for Realty Income and protects it from rising costs for things like maintenance.

Image source: Getty Images.

Realty Income is not the only net-lease REIT you can buy. However, it is the largest of its most relevant peers, with a market cap of roughly $45 billion. That’s more than twice the size of the next closest competitor. Being so large is both a curse and a blessing. On the negative side of the ledger, it requires more investment to grow a large business. On the positive side, Realty Income has advantaged access to capital and the scale to make sizable moves.

And that brings the story to Europe. This is a relatively new market for Realty Income, but it already makes up around 15% of the REIT’s rent roll. At this point, it owns properties in the United Kingdom, France, Germany, Ireland, Italy, Portugal, and Spain. It just added France, Germany, and Portugal to that list in the fourth quarter of 2023, materially expanding its geographic reach. There are opportunities to grow in each of those countries and plenty of additional countries it could add in the future.

Realty Income is tapping a new market

So Realty Income is doing a good job of pushing into a new geographic region. Great! But there’s another important piece to this puzzle that investors need to understand. To provide some context, the United States has long used the net-lease approach and is, for the most part, a mature market. In Europe, the net-lease approach is fairly new and is only just starting to gain traction.

Some numbers will help. In the United States, the addressable net-lease market is estimated to be about $5.4 trillion in size with 12 public net-lease REITs accounting for about 5% of the total. Europe’s addressable market could be as large as $8.5 trillion with just two public competitors accounting for less than 1% of the total. Simply put, Realty Income has a lot of runway for growth in Europe before the region is anywhere near as developed as the U.S. market.

Realty Income’s size, meanwhile, is an advantage in Europe. It is big enough to take on large portfolios of properties in a single transaction. It has a strong balance sheet and advantaged access to capital, which increases the certainty of deals getting closed quickly and on time. And its size advantages mean that it can be an ongoing partner to asset owners as they look to monetize properties over time. Europe is a huge lever for long-term growth.

Realty Income is doing what it should be doing

Realty Income isn’t diving in with both feet in Europe; it is taking a measured and reasonable approach as it builds out this growth platform. That’s exactly what you would expect from this conservatively run REIT. But don’t take that to mean that Europe isn’t an exciting opportunity, because it is. And Realty Income is tapping into that opportunity in a way that should please long-term income investors.

All in all, Realty Income’s 29-year streak of annual dividend increases looks like it has plenty of room to keep going, helped along by the REIT’s European expansion.