There are a lot of things to like about real estate investment trust (REIT) Realty Income (O 1.94%). Usually, valuation isn't one of them. But with the stock down around 20% from its early-2020 highs thanks to the coronavirus pandemic, it is worth taking a deeper dive here to consider if Realty Income is a buy or not today.

The name to watch

With over 6,500 properties, giant Realty Income has become a bellwether in the net-lease space. Net-lease real estate investment trusts own single-tenant properties where the renter is responsible for most of the operating costs. It is generally considered a low-risk approach in the REIT space, with Realty Income making the difference between its rent rates and its cost of capital. And investment-grade-rated Realty Income generally has a low cost of capital, which it locks in with debt and stock sales. 

The acronym REIT spelled out on dice sitting atop coins.

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The fly in the ointment for investors is the stock sales. The problem isn't dilution -- which investors do have to consider when new stock gets sold -- but valuation. The REIT's investment-grade rating means it can issue debt with low interest rates. A high valuation, meanwhile, means it can issue stock at premium prices. A quick gauge of the capital cost of stock is yield. Today Realty Income's yield is roughly 4.5%, which is about middle of the road over the past decade, but toward the low end of its historical range. So the REIT still has access to fairly cheap capital. 

That's good for Realty Income's business, but it means that investors need to think carefully about valuation here. Even being down by 20% or so over the past year, it is hard to suggest that Realty Income is cheap today. Some numbers will help: The REIT's adjusted funds from operations (AFFO) in the third quarter of 2020 was $0.81 per share. Using that as a run rate, Realty Income's price to AFFO comes in at around 19 times. That's a pretty high number for an income-focused investment known for slow and steady growth.

Worth the price of admission?

Put simply, investors with a value focus probably won't like Realty Income even at today's prices. And those looking to maximize their income can likely find better options as well. But Realty Income is a bellwether net-lease REIT for a reason, and that deserves some additional consideration. 

For example, Realty Income has increased its dividend annually for 28 consecutive years. That streak puts it in the exclusive Dividend Aristocrat sphere. And, notably, the streak includes a token increase in each quarter of 2020 despite the pandemic headwinds. For investors that want a dividend-paying stock that has proven itself through good markets and bad, Realty Income looks pretty attractive. 

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The average annual dividend increase over the past decade, meanwhile, was just shy of 5%. That's not huge, but it is larger than the roughly 3% historical rate of inflation growth over time. So the buying power of the dividends here have grown faster than inflation, even if the yield isn't as large as those of some other companies that operate in the same space. This is another plus. 

Then there's the timing of the dividend. While most companies pay quarterly, Realty Income's dividend is handed out on a monthly basis. That makes it pretty close to collecting a paycheck, which retired investors will probably find enticing. So, all in all, for conservative investors willing to pay up for an industry leader, Realty Income's 4.5% yield might be worth the price tag today. Truthfully, the REIT doesn't go on sale very often, and 20% below the early-2020 peak is a pullback worth looking into.

The final call

At the end of the day, Realty Income isn't a good fit for every investor. It tends to be awarded a premium price and, thus, it tends to have a yield at the lower end of its peer group. However, that premium is driven by the REIT's long and successful history, which more conservative investors will probably find very enticing. Realty Income is not a screaming buy today, but for some investors it is probably worth a closer look.