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Realty Income Corp (NYSE:O) has become something of a gold standard for investors who are chasing monthly income.

It's one of the few publicly traded companies with the guts, and the track record, to trademark its nickname: The Monthly Dividend Company®. With more than 15,600 commercial properties and over 660 consecutive monthly dividend payments under its belt, Realty Income is a REIT investors turn to when they want predictable income, even in unpredictable markets.

But there's another perk Realty Income offers its shareholders that doesn't show up in the yield column, and many investors don't even realize they're benefiting from it.

It's called depreciation, and as most real estate investors know, it can be one of the most powerful tax advantages available.

In 2024, Realty Income paid out $3.126 per share in dividends, more than 126% of its estimated taxable income. That may sound like a red flag at first, but it’s actually a feature of REIT taxation, not a flaw.

REITs are required to distribute at least 90% of their taxable income to shareholders in exchange for avoiding corporate income tax. But "taxable income" and "cash flow" are two very different things.

Thanks to depreciation, a non-cash expense that reduces taxable income without reducing actual earnings, REITs like Realty Income can pay out more in dividends than they report in taxable income. When that happens, the portion of dividends that are greater than the taxable income are treated differently.

Here's how that played out for shareholders last year:

• $2.17598 per share was classified as ordinary income

• $0.94952 per share was classified as a nontaxable distribution

That nontaxable portion isn't free money. It reduces the investor's cost basis in the stock, which can lead to higher capital gains taxes if and when the shares are sold. But for long-term holders, that trade-off can be more favorable than paying ordinary income tax every year on the full dividend amount.

In short: depreciation lets investors defer taxes today and potentially pay a lower rate later.

Most investors are drawn to Realty Income for its reliable dividend and consistent growth.

Earlier this month, the company announced its 131st dividend increase since being listed on the NYSE, bumping the monthly payout from $0.2685 to $0.2690 per share. That may not sound like much, but when you compound reliable growth over decades, it adds up.