One of the best ways to round out a diversified portfolio is to allocate some positions toward dividend stocks. While many blue chip companies pay dividends, investors looking for substantial passive income might be better served elsewhere. Real estate investment trusts (REITs) are structured such that at least 90% of taxable income is passed on to shareholders.
One of the leading retail REITs on the market is Realty Income (O -0.17%). But you might not realize that if you only looked at the stock's price action. At just $54 per share, Realty Income is trading dangerously close to a three-year low. Let's take a look at the stock and why investors have soured on it.
While there are some risks surrounding the real estate industry, you might find that the concerns around Realty Income look overdone. With a dividend yield of 5.7%, now could be a terrific opportunity to buy the dip.
Don't let the macro picture fool you
The overall state of the economy can be tough to interpret. While the Federal Reserve has worked hard to bring down the rate of inflation, purchasing power for consumers is not as robust at the moment. As a result, people have been forced to make tougher decisions while out shopping.
The side effect is that retail stores in particular have struggled to entice consumers to spend. On the surface, this dynamic wouldn't engender confidence for a retail REIT. However, a closer look at Realty Income's tenant roster might cause you to think again. Brick-and-mortar stores like Hobby Lobby, Dollar General, Dollar Tree, Walgreens, and Walmart are all among its renters.
Investors could argue that many of these retail outlets are a staple for cost-conscious shoppers. In the event of an economic slowdown, a contrarian might argue that these stores will witness a surge in demand, which would actually be a good thing for Realty Income.
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Another point that investors might be misinterpreting is Realty Income's acquisition of Spirit Reality. While the deal is an all-stock transaction, I wouldn't worry too much. The bigger picture is that Realty Income is augmenting its portfolio with a complementary business that could produce significant benefits down the road.
The company is forecasting the deal to contribute meaningful accretion to funds from operations (FFO), which may be getting overlooked given the current price action of the stock.
Dividend investors will love this
While REITs are attractive for their dividends, there is an extra reason to like Realty Income. The company actually pays its dividend monthly. And it has increased its dividend for over 100 consecutive quarters.
With the stock trading at a 5.7% dividend yield, it's hard to pass on the opportunity to scoop up shares near a three-year low. Furthermore, the long-term theme of consistently increasing its dividend for decades underscores the resiliency of Realty Income and its ability to navigate challenging economies.
O dividend yield data by YCharts.
Should you buy Realty Income stock?
I see two obvious benefits of buying shares in Realty Income right now. The first is that you would be opening a position at a historically low price, all while benefiting from some monthly dividend income.
The second is the potential of the Spirit Realty deal. The sell-off in the stock following the announcement of the deal appears overblown. Some investors might believe this was an attempt to try to distract from a more obvious concern: the state of the economy. I don't see it that way.
Moreover, investors shouldn't discount Realty Income's potential should there be a slowdown anyway. The company appears well-positioned to benefit in the long run, regardless of inflation. Now looks like an interesting time to consider buying shares in this retail REIT. Dividend investors in particular might come to appreciate the consistency of some monthly passive income.
