Realty Income vs SCHD ETF: Better buy for income investors?

A common question among income investors is on the better investment between Realty Income NYSE:O and Schwab US Dividend Equity ETF (SCHD), two of the most common dividend assets. 

Realty Income has become a $60 billion behemoth and a dividend aristocrat after hiking dividends for over 31 consecutive years. It has no expense ratio and has a dividend yield of 5%.

SCHD ETF has recently hit $100 billion in assets under management (AUM) and a tiny expense ratio of 0.03%. So, which is a better investment?

What is Realty Income?

Realty Income is a top company in the real estate investment trust (REIT) industry. Its business model is relatively simple. It acquires freestanding commercial properties and then leases them to tenants across various creditworthy clients. Its top clients are companies like Dollar General, 7-Eleven, Walgreens, Family Dollar, and Life Time Group.

The company uses a net lease structure that lets its clients handle everything related to the properties, including taxes, insurance, and maintenance. At the same time, it has rent escalation clauses, enabling it to have a good revenue visibility in the future.

Realty Income uses long-term debt, equity, and retained cash flow to fund its property acquisitions. This approach helps it to have low financing costs over time. For example, its 2035 bonds are yielding 5.4%, slightly higher than the government bond yield of 4.7%. 

Realty Income is known for its trademarked phrase “The Monthly Dividend Company” in that it pays dividends each month. This makes it a popular company among people in fixed income.

The company has expanded both organically and through acquisitions. It bought Spirit Realty in 2023 in a $9.3 billion deal and Encore Boston Harbor in a $1.7 billion deal. It also bought CIM Real Estate Finance Trust, American Realty Capital, and VEREIT.

Realty Income has moved to expand its business to other areas. Most recently, it formed a joint venture with Cloud Capital to invest in hyperscale data centers in a deal worth $6 billion. It will invest $1.4 billion and have a 45% equity stake in three assets in Northern Virginia.

What is SCHD ETF?

SCHD, on the other hand, is one of the largest dividend ETFs in the world with over $100 billion in assets. This fund invests in companies that have consistently paid and increased their dividends. 

It invests in companies across most industries and excludes REITs. Some of its top firms in the fund are Abbott Laboratories, Merck, UnitedHealth, Amgen, Procter & Gamble, and Home Depot. 

The fund has added billions of dollars in the past few months, and this trend may continue because it is widely seen as an anti-AI fund. 

Better buy between Realty Income and SCHD?

SCHD and Realty Income are different assets and target different investors. In terms of returns, SCHD has been a better investment by far. Its total return this year was 22%, higher than Realty Income’s 17.8%. 

The same happened in the last five years. SCHD jumped by 55%, while Realty Income soared by 22% in this period. It is also a more diversified fund, with losers being offset by gainers. Realty Income, on the other hand, is an individual company that may be exposed to risks in the real estate industry.