Summary

• Realty Income has grown its real estate portfolio and its dividend throughout periods of rising and falling interest rates.
• This implies that investors dont have to fear rising interest rates at all.
• Realty Income is a first-class dividend machine with potential to churn out more dividends in the years ahead whether rates increase or not.
• Realty Income currently yields 4.47%.

Realty Income (NYSE:O ) has been attracting some attention lately because of the rich valuation the company has grown into. Realty Income, a real estate investment trust with a well-earned reputation for paying rising dividends to shareholders, now trades at about 19x 2015 Funds From Operations, or FFO, and 2.2x book value. Despite its high valuation, I specifically advised against selling the REIT recently, mainly because I believe investors should not give up their low cost basis for the sake of some short-term (taxable) capital gains.

Are interest rates good or bad for REITs?

Thats the question thats been debated for some time and there are arguments to be made for both sides.

On one side, rising interest rates hurt companies, especially those that rely on large amounts of debt to finance their operations. Real estate investment trusts surely belong to this group. From a balance sheet point of view, higher interest rates have the potential to decrease a REITs earnings, because they have to refinance their mostly fixed-rate debt at higher rates.

On the other side, rising interest rates can provide earnings tailwinds for REITs like Realty Income. Interest rates in the economy rise if business picks up and demand for goods and services increases, which includes demand for high-quality commercial properties. Consequently, rental growth and valuation upside in the property portfolio work to a REITs benefit.

Why not to worry about rates at all

Realty Income has grown its investment portfolio and its dividend per share over long periods of time, during periods of low AND high interest rates. Consider this chart from Realty Incomes annual meeting shareholder presentation in 2014, which depicts Realty Incomes portfolio growth since the company became a publicly traded entity in 1994:

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Source: Realty Income Shareholder Presentation Annual Meeting 2014

Realty Income has continued to grow its real estate portfolio in the last year: At the end of 2014, Realty Income had a total of 4,327 properties in its real estate portfolio. Since 1994, Realty Income has grown its portfolio by 587%, a time period that included the recession in 2001/2 and the Great Recession in 2007/8. That accomplishment is worthy of a lot of credit.

Realty Income also succeeded in growing its dividend per share over long stretches of time, partly aided by savvy, accretive, and well-timed acquisitions. Realty Incomes annualized dividend per share has increased from just $0.90 in 1994 to $2.20 per share in 2014.

More importantly, Realty Income has increased its annualized dividend even in years in which the economy did really poorly, notably the 2001-2002 and 2007-2009 periods. Those periods are highlighted by the red circles in the chart below.

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Source: Achilles Research, Company Financials

From 2000 to 2002, Realty Income increased its annualized dividend by more than 5% from $1.11 per share in 2000 to $1.17 per share in 2012. Further, Realty Income grew its dividend 13% from $1.52 per share in 2006 to $1.72 per share in 2009. Dividend growth has slowed during this time period, but rising dividends are rising dividends Frankly, Realty Incomes shareholders were well off here compared to other companies that slashed their payouts during the recession.

And there is no reason to assume that growth will stall in the quarters and years ahead: At the beginning of 2015, Realty Income hiked its dividend another 3% .

Your Takeaway

Realty Income has a track record of growth throughout periods of falling and rising interest rates, which speaks volumes about the REITs ability to create value for shareholders independent of the economic environment.

Realty Income is not a stock that lends itself to trading. It is an income vehicle producing reliable cash flows year in and year out. An investment in Realty Income is simple and transparent: Understand the real estate story, collect the dividend, see your yield on cost rise over time, and do nothing. Rates are not going to be an issue for Realty Income. Long-term Buy.

Disclosure: The author is long O. (More) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.