Realty Income Corp (O), Cisco Systems, Inc. (CSCO), KKR & Co. L.P. (KKR): Building an Income Fortress With Dividends

The investment universe today is littered with CDs, bonds, and Treasury notes that produce yields slightly above 0% and don’t even come close to exceeding the rate of inflation. Income-oriented investors seeking a reasonable return on their capital can still achieve a solid, safe and growing stream of dividend income if they select their picks carefully. However, selecting investments based on nothing more than a high current yield can result in a disastrous fall in the share price of a stock if the dividend proves to be unsustainable.

Criteria important to assure growth and safety

When investing to produce an income stream, it is critical to select businesses that have a history of paying regular dividends with a consistent track record of increasing the dividend amount, have a payout ratio that shows management’s commitment to rewarding shareholders and are engaged in delivery of a product or service that is a necessity for its customers. We also must be able to buy the shares at the right price.

It is very easy to find businesses that meet one or two of these requirements; finding businesses that meet them all is a completely different matter. To add even more difficulty to the task, we need to spread our investments across several unrelated industries to reduce volatility and risk.

Commercial real estate

For the real-estate portion of the portfolio, it is hard to find a better opportunity than Realty Income Corp (NYSE:O). When a business likes to refer to itself as “The Monthly Dividend Company,” has trademarked the phrase, and paid a monthly dividend for the last 515 consecutive months, you can bet it’s serious about providing its shareholders with a steady stream of income. All an investor has to do is take a quick glance at the homepage and you will see the intense focus this business has on consistently paying and increasing the dividend rate for shareholders.

Realty Income Corp (NYSE:O) owns over 3,500 properties that it leases under long-term agreements to national retail chains and other commercial interests. The cash flow from these agreements produces the dividends.

The monthly dividend announced on May 8 of 18 cents per share produces an annual yield of 4.15%; extraordinarily strong in our current environment but below the long-term average for Realty Income Corp (NYSE:O). The current dividend yield, although attractive, is the one cautionary note regarding this business as the average yield since 1995 has been 7.4%. However, given the focus of this business on paying and increasing dividends, it deserves serious consideration as a cornerstone investment within any income-based portfolio.