It's hard not to like dividends, especially when they come monthly. Real estate company Realty Income (O 1.94%) is famous for shelling out cash to its shareholders every month. Like most stocks in this market, Realty Income's stock is down, falling more than 13% over the past month alone.
There's a lot of chatter on Wall Street about inflation, recessions, and a fearful stock market, so is Realty Income a buy-the-dip opportunity? Or should investors pass? Here is what you need to know.
First things first: Let's talk dividend
Realty Income is a real estate investment trust (REIT), a type of company that acquires and rents out real estate, paying out at least 90% of its taxable income to shareholders. Business has been good for a long time; Realty Income has paid and raised its dividend for 28 years, making the stock a Dividend Aristocrat. Hold the store for a year, and you'll get a dividend yield of 4.7% based on the current share price -- and as I said above, the company pays you monthly. How sweet is that?
Realty Income has produced great total returns throughout its history. Still, many buy the company for that sweet passive income, so naturally, one wants to know whether the dividend is safe. The good news is that the payout appears very secure. Realty Income owns a diverse portfolio of 11,427 commercial properties, primarily single-tenant, in various recession-resistant industries like low-cost retail and convenience stores.
You can see below how stable Realty Income's cash profits, called funds from operations (FFO), have been over time. Even the peak of COVID-19 lockdowns couldn't push the dividend payout ratio to 100%.
O Funds from Operations (TTM) data by YCharts
This consistency and long-term growth are what help keep those dividend raises coming. If you're looking for reliable income from your stocks and you're happy with a 4.7% yield, Realty Income could be a welcome addition to a diverse portfolio.
Looking deeper
Those interested in maximizing their total returns should look more deeply at the stock. You can see below that while many stocks have fallen to or below their lows from March 2020, Realty Income is undoubtedly not one of them. However, you can see that the shares threaten to break below their lows of the year.
Surging interest rates and a shaky economy are potentially troublesome both for the market and Realty Income. The company raises new funds through debt and by issuing new shares of stock. Higher rates make borrowing more expensive, and lower share prices make equity raises less efficient, so the current economic environment could help explain the stock's recent slide.
O FFO Per Share (TTM) data by YCharts
Today, Realty Income trades at roughly 17 times its FFO-per-share. Does the stock deserve such a valuation? On the one hand, Realty Income's grown FFO by a median of 5.1% annually since 1996, so it's a slow and steady grower by nature. For comparison, the S&P 500 has historically traded at about 15 times profits, which grow by an average of 10% annually. One could argue that the prominent and reliable dividend makes up for its lack of growth. Valuation isn't an exact science, but it seems that Realty Income is at least reasonably priced, just perhaps not a bargain today.
What is an investor to do?
I don't want to risk sounding like I'm getting too cute. Warren Buffett once said that buying a great business at a fair price is far better than purchasing mediocre companies for cheap. Realty Income is undoubtedly a quality business at an arguably reasonable price.
Just keep in mind that until the big-picture storm clouds over the economy clear out, the stock could see more short-term pain. If that concerns you, consider a dollar-cost averaging strategy, which means making small purchases over time to build an investment at a blended cost basis. Either way, Realty Income is a proven winner that seems poised to fill your pockets with cash over the coming years.
