A down market seems like a good time to stock the pantry with equities that are selling at a nice price while carrying the promise of solid returns for years to come. That's true for those interested in either go-go-growth stocks or more stolid income-focused names.
As a retiree, I fall in the latter category and find Realty Income (O 1.46%) a fine option to consider for a buy for 2023 (and beyond) for several reasons.
First, this real estate investment trust (REIT) has a long history of reliably paying dividends. Second, it does that while increasing the payout, not sharply but consistently. Third, it has the cash flow and debt management chops to maintain an investment-grade balance sheet through economic ebbs and flows. And finally, it has a portfolio that is growing and diversifying -- and most importantly -- largely pays the rent on time.
And, as an added bonus, Realty Income pays dividends monthly.
A big REIT with retail as its bread and butter
Realty Income lays claim to being the fourth-largest global REIT, with a portfolio that has grown to about 1,240 clients in 84 industries occupying just more than 12,200 net-lease properties in all 50 states, Puerto Rico, the U.K., Spain, and most recently, Italy. As a net-lease REIT, Realty Income collects rents while its tenants pay most of the operating costs of the properties they occupy.
While classified as a retail REIT -- and indeed, 76% of its business is with retail businesses -- Realty Income is diversifying. The company recently bought a casino and is investing in vertical farming, as well as some small healthcare properties.
But retail remains its bread and butter, with grocery, convenience, and dollar stores accounting for about 26% of its annual rent and roughly 40% of its income from investment-grade operations, led by names such as Dollar General, Walgreens, Walmart, and Home Depot. There's also geographic diversification, with Texas leading the list at about 10% of its rental income, followed by the U.K. at 9.5%.
Still a passive income powerhouse
To say Realty Income is a top-shelf producer of passive income is not a reach. The company boasts a compound annual total return of 14.6% and an average dividend increase of 4.4% since its 1994 listing on the New York Stock Exchange. That's along with paying dividends for 634 straight months and raising its dividend 120 times over that stretch.
This chart nicely illustrates how much dividends enhance total returns. Realty Income's stock price hasn't moved all that much in the past 10 years, but consistently paying rising dividends has had a very beneficial effect on what investors have actually gotten over that time.
Realty Income has a huge addressable market for continued expansion, pointing out, for example, in its recent investor presentation that only about 3% of total U.S. retail properties are held by publicly traded REITs and less than 1% are in Europe.
This big REIT also has the balance sheet to finance growth even though it takes a lot to move the income needle at such a large operation. And it has a long-demonstrated commitment to return value to shareholders through increasing dividend payments.
Shares also are selling for an attractive price (about $62) after being beaten down roughly 15% year over year, compared with a dip of only 6% for the S&P 500. The shares yield about 5%, versus roughly 1.7% for the benchmark index.
Of course, a company needs to generate the cash to pay its dividend. Realty Income currently has a dividend payout ratio of about 77% based on cash flow, which indicates that it comfortably covers its dividend obligations. (REITs are required by tax law to return at least 90% of their taxable income to investors in the form of dividends.)
Another good measure to look at is funds from operations (FFO), the REIT equivalent of earnings per share. This chart shows how much Realty Income's FFO has grown in the past year compared with its dividend, and how the share price has also fallen during that period.
This points to the ability to not only comfortably cover the dividend obligation but to keep raising the payout, as Realty Income has done each year for about 30 years.
Analysts on average have a target price of $71.60 for Realty Income -- a nice potential upside -- and consider it a "moderate buy." I agree and have been doing just that myself, investing moderately in this blue-chip real estate stock for the long term.
