It's hard to believe that 2023 is almost over. As the end of the year approaches, I would not be surprised if some investors begin to trim some gains and reallocate capital. While financial journals all over the world can't seem to write enough about artificial intelligence (AI), it's important to remember that there are many ways to capitalize on markets.
One of the best ways to build wealth is by investing in dividend stocks. However, given the macroeconomic picture remains a bit cloudy, some investors may be wary of investing in companies that might cut its dividend to preserve capital. As I've written previously, one of the best and safest ways to invest in dividend stocks is to look at business development companies (BDCs) or real estate investment trusts (REIT).
One of the steadiest REITs out there today is Realty Income (O -0.17%). While Realty Income certainly faces a number of macro headwinds, I believe now is an incredible time to buy the dip as the stock hovers around three-year lows. Let's dig into the big picture and assess what is going on in the real estate market, how it's affecting Realty Income, and why now could be a lucrative time to scoop up shares at a bargain price and a yield of almost 6%.
How is the real estate market right now?
The Federal Reserve has been fighting a battle against lingering inflation since early 2022. Although indications suggest that inflation is beginning to cool down, the current rate of 3.2% remains higher than the Fed's long-term goal of 2%. One of the ways that the Fed is combating inflation is by raising interest rates. In theory, by raising the cost of borrowing money, consumer spending will slow.
Realty Income is primarily known as a retail REIT. The company's clients include brick-and-mortar stores such as Dollar General, Walgreens, FedEx, Walmart, and AMC.
Remember, inflation impacts a consumer's ability to purchase goods and services. For this reason, many retail outlets have taken a major hit as people scale back on discretionary spending. This is why Realty Income's is at risk. If its tenants struggle to entice consumers, then it makes generating revenue and profit much more difficult. Subsequently, these properties could struggle to make rent payments to Realty Income.
Since inflation remains above the Fed's long-term target and consumer purchasing power remains depressed, is it time to worry about Realty Income?
Image source: Getty Images.
Should you invest in Realty Income stock?
Something that I often encourage investors to do is zoom out and look at the bigger picture. Realty Income has been around for more than 50 years. During that time, the company has faced a number of challenges ranging from intensifying competition to economic recession. And yet, throughout this time, the company has not only survived but thrived. Here are some things to consider.
First and foremost, some economists are calling for an economic slowdown sometime in 2024. Whether this becomes a full-blown recession is tough to predict. Nonetheless, a contrarian might suggest that Realty Income is in a position to benefit from an economic slowdown. The reason is that during tougher economic periods, consumers tend to turn to cost-conscious retail options. Given that some of Realty Income's tenants include Dollar General, Dollar Tree, Hobby Lobby, Walmart, and BJ's Wholesale, it's possible that consumers will resort to these options over other stores or e-commerce during an economic pullback.
Another under-the-radar opportunity that I do not think is baked into Realty Income's growth prospects is its proposed acquisition of Spirit Realty. While the obvious benefit of an acquisition is increasing revenue and profits by broadening your customer base, this deal comes at an interesting time. Given the unique structure of REITs, one of the most important metrics for investors to consider is funds from operations (FFO). FFO is similar to earnings per share (EPS) but is specifically used for gauging the performance among REITs. The chart below illustrates that over the last decade, Realty Income has done a great job increasing FFO per share.
Data source: YCharts.
Given its ability to increase FFO, Realty Income has been able to reward its long-term investors in the form of a monthly dividend. Furthermore, the chart below showcases Realty Income's consistent dividend increases for nearly three decades. This hits on my prior point that over the last 30 years, Realty Income has been able to navigate around challenging economic periods and still reward its investors.
Data source: YCharts.
But the bigger point is that with the stock near three-year lows, markets may not be pricing in the accretive nature of the Spirit Realty acquisition. Per Realty Income's deal rationale, management believes that the company should be able to generate $50 million in annual synergies from the acquisition and is forecasting a 2.5% accretion per share.
The prospects of the Spirit Realty deal, combined with Realty Income's long and proven track record during times of economic cloudiness, make the stock a compelling buy at current trading levels. For investors looking to supplement their portfolio with passive income, now could be a really interesting time to open a position in Realty Income.
