The capital markets have gotten off to a sizzling start this year. The S&P 500 has gained nearly 10% so far in 2024, while the tech-heavy Nasdaq Composite is up approximately 8%.
Indeed, the growth potential from hot areas in artificial intelligence, new pharmaceutical breakthroughs, and the energy sector, in particular, has helped fuel gains across major indices. While buying into these tailwinds can be tempting, investors may want to take a step back and look for steadier opportunities.
Particularly, dividend investors should take a look at real estate investment trusts (REITs), given their reliability for passive income. Realty Income (O 2.53%) is a retail REIT, leasing property to a number of brick-and-mortar outlets.
Let's explore why scooping up some shares in this REIT could be a lucrative choice for long-term investors.
What makes Realty Income unique?
Many companies that pay a dividend do so on a quarterly basis. One of the more enticing features of an investment in Realty Income is that the company actually pays out its dividend monthly.
O Dividend data by YCharts.
Even better, Realty Income has consistently raised its monthly dividend over a long-term horizon. What's more, in early April the company announced it was paying its dividend for the 646th consecutive month.
Image source: Getty Images.
Is the dividend sustainable?
Considering the frequency at which Realty Income raises and pays out its dividend, I understand if you're skittish that the company could suddenly cut the dividend. While this is an inherent risk of any dividend stock, I see things differently with Realty Income.
One of the most important financial metrics to look at when assessing REITs is funds from operations (FFO). Similar to free cash flow, FFO demonstrates how much excess profit a REIT is generating. Simply put, as FFO rises, a company should have the ability to continue paying (or raising) its dividend or invest this cash back into the business for strategic purposes.
Realty Income is doing both. Back in January, Realty Income closed its acquisition of Spirit Realty -- another REIT. The deal provided a way for Realty Income to broaden its reach both geographically and across different verticals in the retail space.
Moreover, during the first quarter of 2024, which ended March 31, Realty Income increased its FFO by 15% year over year to $786 million. Furthermore, management affirmed the company's FFO per share outlook for the full year -- another encouraging indication that Realty Income will generate the cash flow needed to continue paying and increasing its monthly dividend.
Is now a good time to invest in Realty Income?
On the surface, it might seem like Realty Income carries some risk because it is reliant on physical retail and may be susceptible to the threat of e-commerce. However, looking at Realty Income's customers may tell a different story.
Much of Realty Income's portfolio is comprised of cost-conscious retailers, such as Dollar General, Dollar Tree, Walgreens, and Walmart. I see this as a subtle strength for Realty Income. Sure, even cost-conscious retail has faced some turbulence in the current economy. However, I think this pocket of the retail realm is generally strong right now.
The macroeconomy is still fighting a challenging battle with inflation. While the current inflation rate of 3.5% is well below peak rates from 2022, it is still far from the Federal Reserve's long-term target rate of 2%.
Additionally, while some economists believe the Fed will lower interest rates this year, this is still not a guarantee. For all these reasons, I think cost-conscious retail is relatively more insulated from other aspects of the overall retail landscape as consumer purchasing power remains somewhat strained.
US Inflation Rate data by YCharts.
Considering Realty Income's rising cash flow, steady dividend payments, and unique position in the retail sector, I think this is a great choice for dividend investors. With the stock offering a dividend yield of 5.6%, now looks like a lucrative opportunity for long-term investors to scoop up shares.
