Here's How Realty Income Can Afford Its 5% Dividend Yield
Income investors who are looking for yield should take the time to understand the real estate investment trust (REIT) sector. These companies are required to invest in real estate or real estate assets and are required to distribute most of their earnings as dividends. Provided that the REIT follows the guidelines, it can avoid paying corporate Income taxes. These companies generally have high dividend yields, but investors should understand how to determine whether these yields are sustainable. Realty Income (NYSE: O) is one of the most conservative REITs, with a 5% dividend yield. Is this dividend sustainable?
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Realty Income is a REIT that focuses on single-tenant properties under an unusual lease structure called a triple-net lease. Most leases are gross leases, which require the tenant to pay rent while the landlord absorbs the other operating costs. Under the triple-net lease structure, the tenant is responsible for taxes, insurance, and maintenance. These leases generally last a long time (over a decade) and contain automatic escalators. They are also extremely expensive to break.
Source Fool.com
