All stocks have ups and downs, even the magnificent stocks that crush the broader market over time. If it were as easy as stocks only going up, investing wouldn't be as rewarding as it is.
The trick is finding the great stocks that have stumbled and will get back up, avoiding those that have fallen and are down for the count. Realty Income (O -0.17%), down 26% from its high, is one to watch.
This magnificent monthly real estate dividend stock is poised for a rebound and is worth keeping in your portfolio indefinitely.
Here is why.
This monthly dividend machine is down 26%
Realty Income was seemingly designed to shower investors with money. After all, it's a real estate investment trust (REIT), a business structure that requires it to pay out at least 90% of its taxable income to shareholders. REITs allow people to invest in real estate without being millionaires who can buy commercial property.
One of the cool things about investing in Realty Income is that the company pays a monthly dividend, giving shareholders a steady stream of income. Realty Income focuses on retail properties, renting to tenants like gyms, convenience stores, grocery stores, and other businesses that generally thrive in most economic conditions.
So, why is Realty Income down so much? REITs often rely on debt to fund growth since they pay most of their profits as dividends. Higher interest rates over the past couple of years have made funding expansion more expensive. Additionally, higher rates make dividend stocks like Realty Income less appealing to investors who can get competitive yields from other sources like Treasury bonds.
Why you should buy it
Buying Realty Income boils down to acquiring shares in a quality business at an attractive price. Realty Income is unlikely to outrun Amazon in growth in your lifetime. However, over time, it's proven effective at building significant wealth for those able to buy it and hold it long enough to let it work its compounding mojo.
The stock has returned roughly 5,000% over its lifetime had you bought and reinvested the dividends. It's outpaced the S&P 500 nearly three-to-one over that time. The company has only grown its funds from operations (FFO), which REITs report in place of earnings, by 5% (median) annually since 1996. Realty Income exemplifies the tortoise winning out, not the hare.
O Total Return Price data by YCharts
Using management's expected 2023 FFO per share of $4, the stock trades at an earnings multiple of 15. It has bounced off lows on the prospects of lower rates in the future, so it's not as eye-poppingly cheap today as it was at $45, its 52-week low. Still, considering the idea is to buy and hold shares, the valuation isn't yet high enough to prevent investors from holding shares and reinvesting those dividends.
Can investors hold Realty Income forever?
Realty Income has followed its formula of steady expansion for decades, so investors can expect more of the same unless something drastic happens. Holding a stock like Realty Income long term is more about seeing how battle-tested the company is. Can the business endure adversity, continue growing and paying dividends, and let compounding continue to work?
This company has raised its dividend for 30 consecutive years (and counting). During that streak, Realty Income underwent multiple recessions, including the dot-com crash in 2000-2001 and the financial crisis in 2008-2009. It handled COVID-19, a pandemic event not seen in the modern era.
These events, often causing tenants to miss their rents, didn't crumble Realty Income. That's something investors can hang their hat on for confidence in how management runs a business like that. Of course, no stock should ever be held forever without earning it, and Realty Income must continue earning that trust. For now, Realty Income has faced multiple challenges and delivered every time.
