Key Points

  • Realty Income entered the year expecting adjusted funds from operations to fall between $4.38 and $4.42 a share.

  • In the first quarter, the giant net lease REIT raised its adjusted FFO guidance range to $4.41 to $4.44 per share.

  • Another increase in guidance would make this high-yield stock even more attractive.

  • 10 stocks we like better than Realty Income ›

I've owned Realty Income (NYSE: O) for a number of years now, happily collecting its reliable monthly dividends. With a yield of 5%, this is an attractive proposition compared to the tiny 1% yield on offer from the S&P 500 index (SNPINDEX: ^GSPC). The only problem with Realty Income is that it's a bit of a tortoise. A fact that management is aware of and trying to change. Here's what I'd love to see when the company reports second-quarter earnings.

Realty Income is too big to grow fast

Realty Income will never be a growth stock. That's a simple fact that any shareholder has to accept. The real estate investment trust (REIT) structure is designed to pass income on to shareholders, and Realty Income is focused on doing that reliably. That isn't going to change anytime soon. Still, the REIT has other headwinds on the growth front.

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The biggest one is the company's size. With over 15,500 properties, it is multiple times larger than its next closest peer. It simply requires much more acquisition activity to grow a large business than to grow a smaller one. Realty Income's size is a competitive advantage because it provides the company with greater access to capital markets, thereby lowering its cost of capital. But that has to be juxtaposed with the increased need for transaction volume that makes the company a slow-and-steady industry giant.

Given the lofty yield, I'm willing to make that trade-off. However, management is aware of the problem and has been actively looking to expand its investment opportunities. The list of moves includes starting to invest in Europe and, more recently, Mexico. It includes reaching into different property types, such as casinos and AI data centers. And it includes leveraging its in-house skill set to pursue new opportunities, such as debt investing and the establishment of an institutional asset management business.

Realty Income's improving growth outlook

There are a lot of moving parts at Realty Income, so there's no one business decision that will completely change the business. However, taken as a whole, the goal is clearly to support long-term growth. And that is showing up, with the company entering the year projecting adjusted funds from operations (FFO) to fall between $4.38 and $4.42 a share. After the first quarter, that range was updated to $4.41-$4.44 per share.

That's not a huge change, but it is in the right direction. I remain fond of Realty Income and have no plans to sell it anytime soon. That said, I might consider buying more of the stock if the company's adjusted FFO guidance is increased again in early August when it reports second-quarter earnings. A few quarters aren't enough to say the company is on a different growth trajectory, but it is enough to give me even more confidence that management is working in the right direction. And that's really what a long-term dividend investor like myself should be looking for in a reliable tortoise of a high-yield stock like Realty Income.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.