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Stock Strategist

A Monthly Dividend Machine Shifts into Higher Gear

We expect a meaningful dividend increase from Realty Income in 2011.


We've long admired  Realty Income's (O) impressive dividend history, which includes 40 years (and counting) of monthly dividend payments and 13 years (and counting) of quarterly dividend increases. However, in the commercial real estate downturn from 2007 through mid-2010, Realty Income's cash flows stagnated (and even declined in some quarters), yet the firm continued its impressive streak of quarterly dividend increases. Thus, the cash-flow coverage of its dividend payments deteriorated, rising from 83% in 2007 to 96% in the first half of 2010, casting doubt on the continuation of Realty Income's quarterly dividend increases. We took an in-depth look at the sustainability of Realty Income's dividend last August and concluded that Realty Income's dividend--including the regular quarterly increases--was safe. Thus far, the Monthly Dividend Company� has proven us correct.

Instead of Dividend Sustainability, We're Now Focused on Realty Income's Dividend Growth Prospects
Since our August analysis, however, Realty Income's cash-flow prospects have improved substantially, to the extent that our interest in Realty Income's dividend has changed. Whereas we previously examined Realty Income's dividend sustainability, we are now more interested in its prospects for dividend growth. Specifically, in this analysis we attempt to assess when Realty Income may be able to reinstate its historical level of mid-single-digit dividend growth instead of the sub-1% growth investors have experienced recently.

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.