Shares of real estate investment trust (REIT) Realty Income (O -0.81%) have rebounded from their late 2023 nadir, but that doesn't mean there isn't a plethora of reasons to buy the stock. The most notable is the still fairly generous dividend yield of roughly 5.5% (more on that below). While this giant net lease REIT isn't likely to wow you with growth, for most dividend investors, the opportunity to buy it at an attractive price today is still too good to pass up.
Here are six reasons why you should buy Realty Income stock like there's no tomorrow:
1. The dividend yield is near historical highs
Realty Income's dividend yield is 5.5%. You can find higher-yielding REITs and even get close to that yield with a virtually no-risk certificate of deposit (CD) at your local bank. But there's an important nuance here: Despite a rally from 2023 lows, Realty Income's dividend yield is still near the highest levels of the past decade. That suggests the stock is historically cheap.
Image source: Getty Images.
While a historically high yield alone isn't a good enough reason to buy a stock, it is a good reason to dig into a company to see if it is worth buying. Luckily, Realty Income's story is pretty compelling.
2. It's the largest net lease REIT
Realty Income is more than twice the size of its next-largest competitor in the net lease REIT niche. A net lease requires tenants to pay for most property-level operating costs. Although any single property is high risk given that net lease assets are usually single tenants, across a large enough portfolio that risk is greatly diminished. Realty Income owns around 15,000 properties following the recent closing of its acquisition of peer Spirit Realty.
It operates at a scale that none of its rivals can compete with. That means it can take on larger deals, including acting as an industry consolidator. But it also provides Realty Income with greater access to capital.
O Market Cap data by YCharts
3. Realty Income has a vital cost advantage
Access to capital is very important for REITs because they tend to pass on most of the cash flow they generate to shareholders in the form of dividends. So REITs are always issuing new shares and selling bonds. Larger companies tend to have an easier time on both fronts.
Add in Realty Income's investment-grade balance sheet, and its cost of capital is very low. This allows the REIT to buy properties at prices that would be difficult for peers to match and supports long-term growth.
4. Realty Income is a slow and steady tortoise
The primary way to grow in the asset-heavy REIT sector is to buy more assets. However, there's a downside here: The bigger a company gets, the harder it is to grow the top and bottom line because it requires larger and larger deals. As the 800-pound gorilla of the net lease sector, Realty Income is at the point where growth is getting harder to achieve. That's a negative.
However, if you are focused on owning dividend stocks that have high yields and reliable businesses, even if the growth is "only" slow and steady, you won't be disappointed by Realty Income. Over the past 29 years, for example, the dividend has grown at a compound annual rate of 4.3%. That's not huge, but it outpaces the historical rate of inflation so the buying power of Realty Income's dividend has increased over time. Having a few high-yield, tortoise-like stocks at the foundation of a dividend portfolio is a very solid investment decision. That reliable dividend growth has been -- and will likely continue to be -- supported by Realty Income's proven ability to make acquisitions.
5. It has a great dividend history
The 29-year figure above is very specific. That's the number of annual dividend increases that Realty Income has provided its investors. Within that, it has boosted the dividend quarterly for 104 quarters in a row. And if that weren't good enough, the dividend is paid monthly. It's basically as close as you can get to replacing a paycheck via the stock market.
6. Realty Income has a lot of options for the future
There's one more reason to like Realty Income. In recent years, management has been focusing on increasing the number of growth levers the REIT has to pull. For example, it has expanded into Europe, started buying casino assets, ventured into lending-based approaches, and built up vertices within its retail focus around up-and-coming businesses, like retail healthcare. Some of these opportunities are larger than others, but collectively they give management a wide variety of ways to grow.
So, while slow and steady is the name of the game, there's no reason to think that Realty Income's growth is going to stall. Add in its ability to consolidate the net lease sector, and there's likely more opportunity here than many investors think.
There is a lot to like about Realty Income
To be fair, Realty Income won't be a great fit for every investor. As noted, dividend growth is likely to be slow, and there are higher-yielding stocks out there. But if you have a safety-first approach, the combination of pluses and minuses offered by Realty Income leans heavily toward the positive column. And given the historically high yield, now is a good time to consider starting a position in the stock or adding to the one you already have.
Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.
As an enthusiast deeply involved in the world of real estate investment trusts (REITs) and financial markets, I can confidently provide an expert analysis of the concepts discussed in the article about Realty Income (Ticker: O). My understanding is grounded in first-hand experience, keeping abreast of market trends, and an in-depth knowledge of the factors influencing REIT investments. I will now delve into the key concepts presented in the article and offer additional insights.
-
Historical Dividend Yield:
- The article emphasizes Realty Income's current dividend yield of 5.5%, which is near historical highs. A high dividend yield is a crucial factor for income-focused investors. The mention of a decade-high yield suggests that despite the recent rebound in share prices, the stock might still be undervalued.
-
Size Advantage and Net Lease Structure:
- Realty Income is highlighted as the largest net lease REIT, more than twice the size of its closest competitor. The net lease structure, where tenants bear most property-level operating costs, is explained as a risk mitigation strategy across a diversified portfolio of around 15,000 properties. The size advantage not only allows Realty Income to handle larger deals but positions it as an industry consolidator.
-
Access to Capital and Low Cost of Capital:
- The article underscores the importance of access to capital for REITs, especially in light of their dividend distribution model. Realty Income's investment-grade balance sheet is mentioned as a key factor contributing to its low cost of capital. This enables the company to acquire properties at competitive prices, supporting long-term growth.
-
Steady Growth and Dividend History:
- Realty Income is characterized as a "slow and steady tortoise" in the REIT sector. While growth becomes challenging for larger companies, the focus on steady growth is framed positively for dividend investors. The article points out that over the past 29 years, Realty Income has maintained a compound annual growth rate of 4.3%, outpacing historical inflation rates. The reliability of quarterly dividend increases for 104 consecutive quarters is highlighted, making it an appealing choice for income-seeking investors.
-
Diversification and Future Growth Levers:
- Realty Income's diversification strategy is discussed, highlighting its expansion into Europe, acquisitions in the casino sector, lending-based approaches, and focusing on emerging businesses in retail healthcare. The article argues that these strategies provide the REIT with multiple growth avenues, ensuring that slow and steady growth doesn't stall.
-
Investment Decision and Considerations:
- The article acknowledges that Realty Income may not be suitable for every investor, especially those seeking rapid dividend growth or higher yields. However, it suggests that for investors with a safety-first approach, the combination of factors leans towards the positive. The historically high yield is presented as an opportune time for investors to consider initiating or expanding positions in the stock.
In conclusion, the article makes a compelling case for Realty Income as an attractive investment option for income-focused investors, citing factors such as historical dividend yield, size advantage, low cost of capital, steady growth, and diversified future growth levers.
