Can You Fund A College Education By 'Dripping' Realty Income Dividends?

Nobody has to tell parents or grandparents these days how expensive a college education can be. Tuition, books and other expenses have been rising precipitously for decades. Check out this chart below:

2023-24 Academic Year Undergraduate Cost of Attendance

How can you make sure you have sufficient funds when the time comes for your child to go to college? Student loans can help, but much has been written about the devastating effects these loans have on college graduates getting started in the adult world while trying to pay rent, buy a car or save in a 401(k) or individual retirement account (IRA).

The best answer to having enough money saved for your child reaches college age is by starting early and contributing each year. One popular real estate investment trust (REIT) could help that process enormously. Take a look at how it works:

Realty Income Corp. O is a San Diego-based, triple-net lease retail REIT with over 12,400 properties around the world. The Monthly Dividend Company, as it is widely known, is a member of the S&P 500 and an S&P 500 Dividend Aristocrat, with 635 consecutive monthly dividends paid and 120 dividend increases since 1994. It is one of the most widely held REITs among investors today because of its stability and growth.

Over the years, Realty Income’s growth has been both stable and remarkable. Since its initial public offering (IPO) in 1994, Realty Income has had a 14.6% compound annual total return. Its beta versus the S&P 500 is only 0.5, so bear markets won’t deplete your principal balance too badly.

Realty Income’s median adjusted funds from operations (AFFO) per share growth since 1996 is 5%. And since the IPO, its monthly paying dividend has a compound annual dividend growth rate of 4.4%.

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As for tenant stability, Realty Income’s historical median for its portfolio occupancy is 98.3%. Its largest tenants include Walgreens, Dollar Tree, 7-Eleven, FedEx, CVS, Walmart and LA Fitness.

Because of its large size, some analysts have recently cautioned that Realty Income’s growth could be limited in the future. But on May 3, Realty Income proved the naysayers wrong with a terrific first-quarter earnings report.

Funds from operations (FFO) of $1.04 per share beat both the estimates and FFO of the first quarter of 2022 by $0.03 per share. Revenue of $944.39 million beat the estimates by $61.31 million and was 17% better than its revenue of $643.26 million in the first quarter of 2022.

Realty Income also raised its full-year 2023 guidance for FFO per share, from $4.01-$4.03 to $4.05-$4.15 and said it ended the first quarter with a 99% occupancy rate. It’s difficult to beat numbers like that.

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Given these facts, how do you make Realty Income pay for your child’s college? The answer is through a Coverdell Education Savings Account (ESA), using a dividend reinvestment plan (DRIP) on the shares you purchase. Contributions grow and are tax-free but only if withdrawn for qualified education expenses. If the money is used for nonqualified purposes, you will be subject to a 10% penalty on the amount withdrawn.

You can contribute up to $2,000 annually unless your household modified adjusted gross income (MAGI) is above $190,000. The contribution amount phases out between $190,000 and $220,000, and above that would make you ineligible for an ESA.

Suppose you begin with a $2,000 contribution when the child is 3 years old. Realty Income is presently trading at around $60 per share, so that’s 33.33 shares to start. Each year at the same time you will contribute an additional $2000. The monthly dividend of $0.255 or annual dividend of $3.06 presently yields just over 5%.

Calculating an average annual share price increase of 4% and a 4% dividend increase each year, at the end of 15 years, your $30,000 in contributions could increase to $82,715, for a total return of 158.49%. Of that amount, $34,127 is from dividends being reinvested.

Dividend reinvestment with a monthly payer has a slight advantage over using a quarterly payer because the funds compound sooner. If Realty Income was a quarterly payer, the end amount would be about $350 less.

The plan works best with the ESA because it’s tax-free, but if you don’t qualify for an ESA you can still use the same plan in a taxable account, albeit with larger annual contributions to make up for the taxes you’ll have to pay on the dividends received.

Consult with an accountant or other financial professional before starting this plan to make sure that you understand all of its rules and regulations and that you qualify. While nobody can predict how much college tuition and other expenses will be in 15 years, reinvesting Realty Income dividends in an ESA could certainly go a long way toward meeting those costs.

Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
 

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