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.
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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.
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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.
I am a seasoned financial analyst with a deep understanding of real estate investment trusts (REITs) and a track record of providing insights into the intricacies of the market. My expertise is demonstrated through years of analyzing REITs, market trends, and financial data, and my ability to make informed predictions about the performance of specific companies.
Now, delving into the provided article on Realty Income, let's break down the key concepts:
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Realty Income's Dividend Yield:
- The article highlights that Realty Income's dividend yield is near historical highs at 5.5%. Despite the stock rebounding from late 2023 lows, the yield remains attractive. The author suggests that a historically high yield alone is not enough to buy a stock but encourages further exploration.
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Size and Scale of Realty Income:
- Realty Income is identified as the largest net lease REIT, more than twice the size of its next-largest competitor. The net lease structure requires tenants to cover most property-level operating costs. The scale of Realty Income's portfolio, around 15,000 properties, reduces the risk associated with individual properties. This scale also positions Realty Income to take on larger deals and act as an industry consolidator.
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Access to Capital and Cost Advantage:
- REITs, reliant on passing cash flow to shareholders as dividends, need consistent access to capital. Realty Income's large size, coupled with its investment-grade balance sheet, provides a cost advantage. This allows the REIT to acquire properties at competitive prices, supporting long-term growth.
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Steady Growth and Reliability:
- The article describes Realty Income as a slow and steady player in the REIT sector. While the challenge of growing significantly in the asset-heavy REIT sector is acknowledged, Realty Income has a history of reliable dividend growth. Over the past 29 years, the dividend has grown at a compound annual rate of 4.3%, outpacing historical inflation rates.
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Dividend History:
- Realty Income boasts an impressive dividend history, with 29 consecutive annual dividend increases and 104 consecutive quarterly boosts. The fact that the dividends are paid monthly adds to the appeal, providing a steady income stream for investors.
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Diversification and Future Opportunities:
- The article points out Realty Income's efforts to diversify and explore various growth opportunities. This includes expanding into Europe, entering the casino assets market, exploring lending-based approaches, and building vertices within its retail focus. The management's strategic moves suggest a commitment to expanding growth levers.
In conclusion, the article provides a comprehensive overview of why investors might consider buying Realty Income stock, emphasizing its historically high dividend yield, size advantage, cost efficiency, steady growth, impressive dividend history, and the diverse opportunities for future expansion. The information is presented by the author, Reuben Gregg Brewer, who discloses having positions in Realty Income. The Motley Fool, which he writes for, also has positions in and recommends Realty Income, as well as recommending W. P. Carey.
