Realty Income is still one of the top plays in this out-of-favor sector.
Real estate investment trusts (REITs) are usually popular investments for income investors. They purchase a lot of properties, rent them out, and split the rental income with their investors. They also need to pay out at least 90% of their taxable earnings as dividends to maintain a favorable tax rate.
Unfortunately, many REITs slumped over the past two years as rising interest rates made it more expensive to buy properties, curbed the growth of their business tenants, and made fixed income investments like CDs and T-bills more appealing. But as Warren Buffett said, investors should be “greedy when others are fearful” — and it might be smart to get greedy with REITs before interest rates decline again.
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However, with nearly 1,000 REITs on the market today, it can be hard to pick the right one as a long-term dividend play. So, if you’re wondering where to put $1,000 in the sector right now, I’d suggest Realty Income (O 0.74%) for four simple reasons.
1. It’s one of the largest and most diversified REITs
Realty Income is a net lease REIT, so its tenants need to cover most of their own property management expenses — including maintenance costs, property taxes, and insurance fees. It maintains about 15,450 properties around the world.
Its top tenants include recession-resistant retailers like Walgreens, 7-Eleven, Dollar General, Dollar Tree, and Walmart. Some of those retailers have been struggling with store closures in recent years, but none of its top tenants account for more than 4% of its annualized rent. It’s also kept its occupancy rate above 96% over the past three decades, so it can likely replace its weaker tenants with stronger ones.
2. It pays a high monthly dividend
Realty Income has paid consecutive monthly dividends ever since its founding in 1969, and it’s raised its payout 125 times since its initial public offering                   in 1994. It can maintain that streak since its dividends only consumed 75% of its free cash flow (FCF) over the past 12 months.
Today, it pays a forward yield of nearly 6% — which would net you almost $60 in extra dividend income per year from a $1,000 investment — versus the 10-year Treasury bond’s 4.3% yield. If you had invested $1,000 in Realty Income 20 years ago and reinvested your dividends, your stake would be worth about $7,430 today and would pay over $440 in annual dividends.
3. It generates consistent growth
We usually gauge a REIT’s bottom-line growth through its adjusted funds from operations (FFO) per share instead of its earnings per share (EPS). From 2010 to 2023, Realty Income grew its adjusted FFO per share at a compound annual growth rate (CAGR) of 6%, even as it endured several economic downturns and a global pandemic.
The company also grew inorganically by merging with its peers VEREIT in 2021 and Spirit Realty this year. That expansion should further widen its moat and diversify its business.
4. It’s historically cheap
At $53 per share, Realty Income trades at just 13 times last year’s adjusted FFO. That’s a historically low valuation, which is in line with its industry peers. Vici Properties (NYSE: VICI), another reliable REIT that mainly focuses on the casino gaming and entertainment sectors, also trades at about 13 times last year’s adjusted FFO.
Realty Income’s low valuation should set a floor under its stock for now. As interest rates stabilize and decline over the next few quarters, its valuations should rise as more income investors rotate from fixed-income investments to REITs again.
Just don’t expect millionaire-making gains
Realty Income should be a safe place to park $1,000 right now, but investors shouldn’t expect it to generate millionaire-making gains over the next few decades. As its name suggests, it’s a great way to generate extra monthly income — but it’s probably better suited for older investors who value stable returns over aggressive long-term gains.
Leo Sun has positions in Realty Income and Vici Properties. The Motley Fool has positions in and recommends Realty Income, Vici Properties, and Walmart. The Motley Fool has a disclosure policy.
