Realty Income’s diversification strategy continued to pay off in the quarter, as retail same-store rental revenue slipped 0.3%, while industrial same-store rental revenue grew by 1.9% and gaming increased 1.7%. Other properties, which include data centers, saw a 4.7% jump in same-store rental revenue.

The REIT invested $740 million into new properties in the quarter with a 7.4% weighted-average cash yield. It also sold 92 properties for proceeds of $249 million.

Its adjusted funds from operations (AFFO) per share, which is a measurement of the cash flow a REIT can generate from its operations, increased by 3% to $1.05.

Realty Income increased the low end of its full-year AFFO guidance, taking it to a range of $4.17 to $4.21, up from prior guidance of $4.15 to $4.21. It now expects to invest $3.5 billion in new properties, up from a previous expectation of $3 billion.

Despite the recent pressure on some of its tenants, Realty Income’s dividend looks safe and should continue to grow.

The REIT increased its dividend by 3% to $0.789 in the quarter. It has now raised its dividend 108 consecutive quarters.

The dividend was easily covered by the $1.05 in AFFO it produced in the quarter, good for an AFFO payout ratio of 75.1%. This robust coverage gives Realty Income plenty of room to continue to raise its dividend moving forward.

Realty Income stock is facing both headwinds and tailwinds at the moment. While the REIT is confident recapturing any lost rent from store closures, the struggles of Walgreens, CVS, Dollar General, and Dollar Tree/Family Dollar need to be monitored, as these four tenants make up about 11% of its annualized contracted rent. They obviously won’t be closing all of their stores, but it should be some type of headwind.

Meanwhile, a lower interest rate environment should be good for the stock and the value of its properties. Realty Income stock has struggled despite steady results in recent years, largely due to higher capitalization rates (cap rates), which cause commercial property valuations to decrease. However, as the Fed has started to lower interest rates, cap rates have started to come down, increasing commercial property values.

Overall, I think the interest rate environment should be the bigger driver of the stock in the years ahead, as Realty Income has proven to be able to navigate customer credit issues and store closures in the past. Meanwhile, its foray into private funding looks like it should be a positive for the REIT, and would likely be for a buyer of the stock on this dip.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

Do the Prospects for Dividend Favorite Realty Income Look Strong, or Is Trouble Brewing? was originally published by The Motley Fool