Nothing goes up or down in a straight line. That includes stock markets and economies, which is important for investors to remember. Indeed, when you look to buy a stock, make sure the company backing it has what it takes to deal with the adversity that will eventually befall it at some point.
Realty Income (O +1.36%) has proven that a correction won't be more than a short-term negative over the long term. Here are three reasons why you should see this real estate investment trust (REIT) as a safe haven for a potential storm.
1. A simple and powerful model
Realty Income is what's known as a net lease REIT. This means that it owns single tenant properties for which the lessees are responsible for most of the asset-level operating costs. Any single property is high-risk, given that there's only one tenant. However, across a large enough portfolio the risk is fairly low, given that Realty Income doesn't face material operating costs. The REIT, for reference, is among the largest in the net lease space, with over 11,000 properties.
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There's more to this story, though. The majority of Realty Income's portfolio is retail (about 77% of rents), where the properties are pretty generic and relatively easy to release or sell. Roughly 17% of rent comes from non-retail assets, which are mostly warehouses and industrial properties. And the rest (6% of rents) is classified as other, which is a mixture of a casino and vineyards. On top of that, Realty Income has been increasingly investing in Europe, where it now has $4.3 billion worth of assets. While Realty Income isn't the most diversified net lease REIT you can own, it has become more and more diversified in recent years. Diversification is good for your portfolio and it's good for REIT portfolios, too.
As long as Realty Income continues down the path it's on, there's little reason to believe that a downturn in the market or the economy will derail it.
2. The dividend
That last statement is backed up by the fact that Realty Income has increased its dividend every single year for 27 consecutive years. That makes it a Dividend Aristocrat, part of a highly selective group of companies. But think back over the past 27 years. It's a period that has included the 2000 tech crash, the 2007 to 2009 recession and bear market, and the 2020 pandemic, market crash, and recession. Realty Income sailed right through each. That's not to suggest that its stock price didn't fluctuate with the market and economy, but its actual business never faltered. That's what lets a company survive hard times.
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Key Data Points
3. Capital advantage
The market, meanwhile, is well aware of the above factors. They are basically the reasons why Realty Income is considered a bellwether in the REIT industry. But the broad appreciation of the company's strong industry position has more positives than you might think. Bond-rating agencies (and bond investors) know just how well run Realty Income is and has adorned it with an investment-grade credit rating. This means that Realty Income can get relatively cheap capital from lenders.
Equity markets also know the REIT is well run, so it is usually afforded a premium price relative to peers. In fact, the current 4.2% dividend yield is toward the low end of Realty Income's historical yield range. However, that means it also has access to relatively cheap equity capital. Having access to low-cost debt and equity gives the REIT a material advantage when it comes to buying new assets.
That's a benefit that could become even more pronounced during a downturn. Indeed, companies with property may prefer to do sale/leaseback deals when other forms of capital are getting increasingly expensive. Realty Income has been and will continue to be ready to help them out.
Nothing is perfect, but...
Realty Income has flaws, such as its material exposure to retail properties. That said, the benefits here will likely outweigh the negatives for most investors over the long term. And that will show up most acutely when times are tough in the market and the economy. That's why conservative types will probably want to jump aboard now, so they can focus on collecting the REIT's monthly paid dividend -- it'll make riding out the next rough patch that much easier. And you might even get the added bonus of Realty Income investing in the downturn so it comes out the other side an even better company.
