Realty Income (O +0.74%) has trademarked the nickname "The Monthly Dividend Company." One big takeaway from this choice is that the real estate investment trust (REIT) is heavily focused on consistently paying dividends to shareholders. If that sounds like a company you'd like to own, there's still time to buy it even though the stock has rallied of late.
What does Realty Income do?
Before getting into a valuation discussion, it is important to understand Realty Income's business. It is a property-owning REIT, but it uses a net-lease approach. Net leases require tenants to pay most property-level operations costs. That protects the REIT from inflation to a large degree. And while virtually all of Realty Income's properties are single tenant, making any individual property a high risk, across a large portfolio the net-lease approach is fairly low risk. Realty Income owns over 13,200 properties.
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It is, in fact, the largest player in the net-lease space. To put a number on that, its market cap is roughly $42 billion, making Realty Income more than twice the size of its next-largest competitor. Size comes with advantages, including the ability to spread costs over a larger revenue base, greater access to capital markets, and the ability to take on larger deals. Although being so large also makes it harder to move the needle on the top and bottom lines, Realty Income is a differentiated company in the net-lease space.
Realty Income's stock has fallen hard
That said, Realty Income's share price has fallen roughly 25% since hitting a recent peak in 2020. There are a host of reasons for this. The one that has lingered longest is probably interest rates. Rising rates are a headwind for real estate companies because they increase the cost of capital. Although property markets eventually adjust to higher rates, it can take some time.
Also, higher rates make income alternatives more attractive. For example, Realty Income's 5.2% dividend yield is only a touch higher than what might be available from a high-yield CD. Although there's a huge benefit in Realty Income's 29-year streak of annual dividend increases, owning a CD would allow investors to avoid the risk of owning a stock.
But it is important to recognize that the stock decline has pushed Realty Income's yield up toward the highest levels of the past decade. So for long-term dividend investors, it is probably an attractive investment choice.
O Dividend Yield data by YCharts
Not as great an option, but Realty Income is still attractive
There's a caveat here, however, when you look at Realty Income's stock over the short term. The stock is up around 15% over the past three months or so. That's largely driven by investors believing that the interest rate increases the Federal Reserve has made are at an end. Regardless of why, however, the opportunity to buy Realty Income just isn't as good as it was a few months ago.
That's a simple fact, highlighting that the yield, while high, is not the highest it's been over the past decade. So buying Realty Income today is more like buying a great company at a good price rather than buying a great company at a great price. If you missed the peak yield, don't assume that the buying opportunity is over. It is hard to complain too much about a 5%-plus yield at a time when the S&P 500 index is only offering 1.4% yield and the average REIT yield is 3.9%. So what if the opportunity isn't as good as it was? Realty Income still looks like an attractive dividend stock.
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Key Data Points
You didn't completely miss the boat
Wall Street is warming up to Realty Income again after dumping the stock as interest rates rose. It isn't as attractively valued today as it was just a few months ago, using yield as a rough gauge of valuation. But it is still attractively priced when you look over a longer time period and relative to other income options. If you are trying to build a portfolio filled with reliable dividend stocks, it should still be on your buy list.
