The best part about owning dividend stocks is that you can think of your expenses in terms of how many shares you need to cover a certain expense. For example, suppose you pay $100 per month for car insurance. You might ask, How many shares of a monthly dividend stock like Realty Income (O 1.28%) would I need to pay that bill using passive income?
It's 390 shares in this case.
If you do it right, you can build your portfolio to generate the funds needed to pay your bills. Eventually, you could reach a point where you spend less time working and more time doing the things you enjoy or maybe just kicking back on a beach somewhere.
Whatever you aim for, consider buying some Realty Income stock to help you achieve it. Here's how it can work.
Realty Income helps fund reliable revenue streams
Realty Income is a real estate investment trust (REIT). It specializes in real estate and allows investors to benefit from the perks of owning real estate without actually owning it. It combines aspects of being a landlord with owning stocks. REITs must pay out at least 90% of their taxable profits to shareholders, so REITs like Realty Income make great dividend stocks.
As a real estate company, Realty Income depends on high-quality tenants who will pay their rent. Otherwise, investors don't get paid. That's where Realty Income shines. It focuses on retail tenants that operate recession-proof businesses. Think grocery, convenience, and dollar stores -- places people shop during good and bad times.
Image source: Realty Income.
It's been a winning formula for Realty Income, whose profits have been resilient regardless of the economy. The pandemic was a real estate crisis, yet Realty Income's cash from operations never dropped more than 7%. In other words, the money is routinely there to pay its dividend.
O Funds from Operations (TTM) data by YCharts
Realty Income has an ironclad dividend
That reliable cash flow has made Realty Income a dependable dividend stock. The company has paid and raised its dividend for 31 consecutive years. It's also a high-yielder; investors get 5.7% at today's share price.
The dividend payout ratio is also just 71%. Remember how I said cash flow never dipped more than 7% during the pandemic? Yep, that's a 22-point margin of safety in the dividend payout.
O Cash Dividend Payout Ratio data by YCharts
The company's dividend hasn't grown very fast, just 3.6% annually over the past five years. However, add its high starting yield of 6.1%, and Realty Income can be an excellent stock to hold and let the dividends pile up over time. Reinvesting the dividends can turbo-charge your portfolio returns, too.
Are shares worth buying today?
The price you pay becomes especially important for Realty Income since the business doesn't grow quickly. Overpaying can lead to underperformance if the business has to catch up to a high valuation. So, is Realty Income attractive today?
The stock trades at 13 times its funds from operations (FFO), a REIT's equivalent of earnings. Meanwhile, analysts expect the company to grow its FFO by 3% to 4% annually over the next several years.
That's not a bargain-level valuation for such little growth, but Realty Income's quality fundamentals also earn it some premium. Overall, I'd argue that shares are fairly valued today. Investors can look for high-single-digit total annual returns and a dividend that will continue growing.
Remember that Realty Income can be sensitive to yields on U.S. Treasury bonds. Higher Treasury yields make borrowing, a key part of a REIT's business model, more expensive, creating headwinds for Realty Income. Investors may also flock to Treasuries over stocks if the yield is appealing enough. You can see the inverse relationships below:
O Price to CFO Per Share (TTM) data by YCharts
To summarize, Realty Income remains a conservative but high-quality dividend stock that can give investors monthly cash flow. Those looking to pay their bills passively shouldn't hesitate to consider the stock.
