It's a favorite investment among America's wealthy.
It also has nothing to do with stocks or bonds. Nor is it affected by the economy.
I'm not talking about hedge funds... accredited investment deals... or private offerings. But about another investment that has been known to shelter wealth more resiliently than any of these... a source of perpetual income that has supported the lavish lifestyles of wealthy Americans through good times and through bad.
And it does this by growing faster than the rise of inflation... an average 10% a year for the past 60 years.
That's enough to double your income every four years.
That means every $1,000 invested in 2005 would have grown to $4,000 by 2013, and would possibly grow to $16,000 by 2021 if this investment continued compounding at its 60-year historical average growth rate.
Projected Growth Using This Wealth-Generating Asset
If you've read my previous essays on this investment before, you know that thanks to a law hidden deep inside the Cigar Excise Tax Extension Act, signed more than 50 years ago by President Eisenhower, it's now possible for ordinary Americans to tap into the same income source.
In fact, you can start investing in these "Eisenhower Trusts," as I've nicknamed them, with as little as $500. And though they aren't stocks, bonds, options, commodities, currencies or mutual funds, you can easily take advantage of them through your regular broker. Most importantly, you can start receiving income from these investment vehicles in as little as 90 days.
Today, I want to share one of my favorite "Eisenhower Trusts" with you. I originally recommended it to my High-Yield Investing readers back in September. And while it's just one of many "Eisenhower Trusts" that investors can buy today (I cover several more in my latest research report), my goal is for you to understand the power these investments have to generate massive income for your portfolio by the time you finish reading today's essay.
Realty Income (NYSE: O) was built for a single purpose: to throw off a rising stream of tax-advantaged rental income. The company began that mission in 1992 with 600 scattered properties. A decade later, the portfolio had doubled in size to 1,200 properties. And today, this coast-to-coast empire spans more than 3,600 properties.
Most of the firm's $9.2 billion portfolio is invested in freestanding retail properties located in prime, high-traffic spots. And they are leased to reliable tenants that dutifully pay their rent on time each month.
And these tenants aren't regular individuals -- Realty's tenants are well-known, trusted companies like Taco Bell, Circle K, Walgreens and Regal Cinemas.
When Realty Income debuted on the New York Stock Exchange in 1994, the company was generating approximately $40 million in funds from operations (FFO) annually. Now, it's churning out $40 million per month, or $119 million last quarter.
Because the company is structured as a Real Estate Investment Trust (REIT), every penny of that profit is exempt from the tax bite of Uncle Sam. That leaves more cash on the table to be divvied up. And distributions are paid out monthly, which means your interest compounds even faster.
In November, Realty Income made its 520th consecutive monthly dividend, a remarkable stretch that dates back 44 years to 1970. Right now, investors are getting $0.182 monthly, or $2.19 per year for a dividend yield of 5.4% at recent prices.
Payouts have been rising steadily, often more than once per year -- and sometimes every 90 days. In fact, the company has announced 63 consecutive quarterly dividend increases. On average, distributions have been climbing 7.4% annually over the past two decades.
If that pace continues, dividends would rise another 43% over the next five years and double over the next 10.
There have been some harsh commercial real estate downturns over the past 40 years. But Realty Income has been a steady all-weather performer. Even during the financial crash and recession of 2008-2009, occupancy rates never dipped below 96%.
Today, they stand at 98.2%, with minimal deviation from quarter to quarter.
Part of that stability comes from the deep tenant base -- the firm rents to businesses in 50 diverse industries ranging from apparel to grocery stores.
Second, the properties are typically rented under triple-net leases. This means the tenants (not the landlord) are responsible for property taxes, insurance and maintenance expenses, which helps minimize the impact of rising upkeep costs and leads to superior margins. Better still, most leases have built-in clauses that stipulate automatic 1% to 2% annual rent hikes.
Finally, most of the company's renters sign long-term leases that range from 10 to 25 years, with 11 years remaining on its average lease.
All of this helps explain why Realty Income's mailbox keeps filling up with rent checks every month -- and why investors haven't missed a dividend since Richard Nixon was president.
This is clearly a business built to generate buckets of cash through thick and thin.
Realty Income just closed the books on another record-breaking quarter. After evaluating the results, I'm even more impressed with the company than I was when I first recommended it to my High-Yield Investing readers last summer.
Through the first nine months of 2013, Realty Income generated $337.4 million in funds available for distribution and paid out $298.5 million in dividends, leaving an excess of $38.9 million.
That's more than double the $19.0 million that was left over after dividends at this time last year. It's not often you see a company raise its distribution by 20% and have a lower payout ratio than it started with. That means there is more room to keep paying dividends even if cash flows shrink. But that's unlikely.
The company has invested $1.5 billion in new properties in the past year. And it won't have to look hard to find renters. In fact, these new properties are already 100% occupied under leases that throw off 7% yields on investment.
This is still a stock that should be approached for income first and capital appreciation second. But I think investors should capture some of both over the next 12 to 24 months.