Realty Income (O 0.95%) was founded 54 years ago. That longevity is impressive, but whether investors should pick up the stock depends on its future prospects.
Realty Income is a real estate investment trust (REIT), a sector that has had a rough go this year. The FTSE Nareit All Equity REITs index has fallen about 9% since the start of 2023. That compares with a 13% gain for the S&P 500.
With Realty Income's shares losing 20% this year, what should long-term investors do?
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Tied to retail
Realty Income's properties have a heavy tilt toward retailers, with 82.5% of its annual rent coming from the sector. That may concern some investors given the trend toward online shopping.
But management has been able to keep occupancy rates high and push through rent increases. In the second quarter, occupancy was 99%. And it was able to extract an average 3.4% increase on renewed leases.
About 40% of Realty Income's rent comes from investment-grade rated companies. While that's worth keeping an eye on should the economy falter, the company has navigated through troubled times in the past. It got through the pandemic when 48% of its rents were derived from tenants with investment-grade ratings.
Management rents to large, established retailers that have an omnichannel approach or a strong physical presence. This mitigates the risk of online sales taking away business. Tenants include convenience stores, grocers, dollar stores, home improvement stores, and restaurants. Walgreens Boots Alliance, Walmart, and Home Depot are some of the major retailers that account for significant shares of annual rent. Dollar General generates 3.8% of Realty Income's rent. While that retailer has hit a rough patch, it still has investment-grade ratings.
Frequent and higher dividends
Realty Income pays dividends monthly. It's always nice to receive a check, and the company has a history of raising payments multiple times a year.
Last month, the board of directors increased the monthly dividend from $0.2555 to $0.256. That marked 104 straight raises to the quarterly payout. It ended 2022 with a monthly payout of $0.248.
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Key Data Points
Adjusted funds from operations (AFFO), a key metric for REITs that's meant to measure cash available for distribution, support these higher payments. In the second quarter, dividends were 76.5% of AFFO.
Should you buy Realty Income?
REITs must pay out at least 90% of their annual income as dividends. That makes them ideal for income-oriented investors. But higher interest rates typically pressure these stocks because they compete with fixed-income instruments, such as bonds.
However, Realty Income's stock has a very attractive 6.1% dividend yield, 4 times the S&P 500's 1.6% yield, and 1.3 percentage points more than the 10-year Treasury yield.
A strong tenant base generating cash flow to support ever-increasing dividends adds up to a buy.
