The 3 Best Times to Buy Realty Income Corp and National Retail Properties, Inc.

Timing investments is one of the challenging, yet essential tools for investors. Here are three way to tell when it's the right time to buy REITs.

May 7, 2014 at 7:00AM

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The world's first billionaire, John D. Rockefeller, said, "Do you know the only thing that gives me pleasure? It's to see my dividends coming in."

For investors hoping to capture Rockefeller's delight, Realty Income (NYSE:O) and National Retail Property's (NYSE:NNN) near 5% dividend yields can be tantalizing. This may seem like an especially good bet considering both companies strong first quarter results.

However, as many investors have learned the hard way, buy a stock at the wrong time and price depreciation could deflate your ultimate return.

Here are the three best times to buy an equity REIT.

3. When the dividend yield is high  
If you believe in a business and its management, the best time to buy is when the price is low. Determining when the price is low, however, can get a little tricky. Many analysts use complex measures such as discount to net asset value (NAV) -- I prefer a simpler approach.

Realty Income and National Retail's price per share and dividend yield mirror each other. Therefore, if the dividend yield is high, or higher than its historical average, we can assume that the price is fairly low. The chart below shows only Realty Income for simplicity -- it works the same for National Retail. 

O Chart

There's a reason I said "when the dividend yield is high" and not when the price is low. In 2013, Realty Income added more than 800 properties to its portfolio, and another 300 plus in the first quarter of 2014. Because of this, Realty Income has increased its divided by 20% since the beginning of 2013. 

For that reason, while Realty Income's price may seem high, its dividend yield is the highest it's been since 2010. On the other hand, National Retail's stock price is historically high, and its dividend yield is historically low. 

2. When the economy is growing
Realty Income and National Retail use sale-leasebacks to acquire properties. Much like the name implies, the two companies purchase properties and lease it to the seller. While this model has more than its share of benefits, it means there will be the greatest opportunity for growth when businesses are expanding, and the economy is flourishing. 

There are tons of economic indicators that signal a strengthening economy. One that works particularly well is unemployment. As the chart below shows, since 2000 Realty Income and National Retail have grown assets the fastest during times of low or decreasing unemployment rates.

NNN Total Assets (Annual) Chart

Source: YCharts.

1. Consistently
Buying at the best possible price means buying when everyone else is selling, and that can be incredibly difficult. Luckily, there's a simple solution called dollar-cost averaging. The idea is that if you buy consistently you'll sometimes buy high, sometimes low, but over time, it will average out to a fair price.

Here's the catch: if you tried to do this on your own, you'd get hammered with transaction fees.

Since Realty Income and National Retail benefit from more people investing in their company, they went ahead and solved this problem. Both companies have a direct stock purchase plan where investors can set up an account – for National Retail it's free, and for Realty Income it's $5 – and buy stock without transaction fees.

Are REITs the top dividend stocks for the next decade?
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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