Financial decisions like choosing whether to purchase, hold, or sell a stock can prove stressful. After all, it's your hard-earned money at stake.
But you can alleviate some of this stress by examining a company's fundamentals. Realty Income (O 0.91%), a real estate investment trust (REIT), must pay out at least 90% of its taxable income as dividends.
That makes REITs suited for income-oriented investors. But is Realty Income an attractive stock in the sector or should you look elsewhere?
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Property portfolio
Realty Income collects the majority of its rents from the retail sector. Nearly 83% of its annual rent comes from that industry. That may cause some concern given the proliferation of online shopping. Management takes steps to minimize this risk, however.
This includes looking for retailers that face limited threats from online shopping or have strong omnichannel presences. It collects over 60% of its rent from industries like grocery, convenience, dollar, drug, home improvement, and automotive service stores.
Retail tenants include Walgreens Boots Alliance, Dollar General, FedEx, and Walmart. While the retail sector notoriously changes and leaves previously venerable companies in the dustbin, Realty Income has high occupancy and has been implementing steady rental increases. At the end of the third quarter, occupancy was 98.8% and it reaped 6.9% more rent on expiring lease agreements.
And the company will expand and diversify its real estate portfolio after it completes the $9.3 billion Spirit Realty Capital acquisition. Management expects the deal to add 2.5% to its per share adjusted funds from operations (AFFO).
Cash flow and dividends
High occupancy and higher rents have led to strong cash flow. That's an important consideration for shareholders relying on dividends.
Realty Income's AFFO, a measure of cash available for distribution, continues to grow. In the latest quarter, AFFO increased by 4% to $1.02 a share.
This can easily support Realty Income's dividends. Making payouts monthly, the board of directors raised September's payout from $0.2555 to $0.256 per share, marking 104 straight quarters with an increase. The company can easily afford the payments. Management expects this year's AFFO per share to come in at $3.98 to $4.01 per share, while annualized dividends at the new rate total $3.07 per share.
Realty Income's stock has a dividend yield of 5.7%, nearly quadruple the S&P 500's 1.5%. The FTSE Nareit All Equity REITs index had a dividend yield of 4.1% at the end of November.
The decision
Realty Income's stock has a -10% return this year compared to 22.3% for the S&P 500.
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Key Data Points
The underperformance may be due to concern about some of Realty Income's tenants, such as Walgreens. However, so far, it's been able to keep occupancy rates high and get nice boosts on renewals. And the Spirit Realty deal will help diversify its tenants.
With a juicy 5.7% dividend yield, investors looking for dividends should find plenty to like about Realty Income's shares.
