Let's not bury the lead: Realty Income (O +0.72%) alone probably won't make you a millionaire. But most stocks, alone, won't do that without you having to take on a material amount of risk and uncertainty.
It's far better to take a portfolio approach. Realty Income can be a foundational piece of a millionaire-maker portfolio, especially if you buy it today when the stock looks undervalued.
How cheap is Realty Income?
Using dividend yield as a rough gauge of valuation, Realty Income looks about as cheap today as it has been at any point over the past 10 years. In fact, the only time the yield was higher was during the brief bear market that occurred at the start of the pandemic. The current dividend yield for this real estate investment trust (REIT) is roughly 6% or so.
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But there are some other comparison points worth looking at here as well. For example, the yield of the Dow Jones U.S. Real Estate Index is 3.95%. And the yield on the S&P 500 index is just under 1.3%. So not only does Realty Income look attractively priced, but the yield is also pretty attractive compared to key benchmarks.
What does Realty Income do?
Realty Income is a giant in the net lease space, with a market cap more than three times larger than its next closest competitor. Net lease REITs own single-tenant properties with leases that require the tenant to pay most property-level expenses.
Although any single property is high risk given there's only one tenant, across a large portfolio the net lease approach is fairly low risk. Realty Income owns a huge 15,400 properties and has an investment-grade balance sheet.
NYSE: O
Key Data Points
All of these facts are vital to understand because net lease transactions are often a way for property sellers to raise capital without having to issue stock or sell debt. Realty Income's strong financial position and scale afford it advantaged access to capital markets, which means it can compete aggressively for assets and still turn a profit.
So property sellers will find Realty Income offers them a good deal. The REIT can also act as an industry consolidator.
Realty Income basically has a leg up on smaller peers, though to be fair, it takes a lot to move the needle at such a large company. Still, there's no reason to believe that this reliable dividend stock (the dividend has been increased annually for three decades) is going to stumble from a business perspective.
Using Realty Income to get to seven figures
Realty Income is actually kind of a boring company. But that is also its strength, because it can act as a foundation for other, riskier stocks.
You start with a roughly 6% yield and then add on dividend growth of around 4% a year (which is its compound annual growth rate over the past 30 years). If the stock price goes up by roughly the dividend growth, which is what needs to happen to keep the yield constant, you easily get to a 10% return. That's hard to complain about since it tracks with the long-term expectations most investors have for the broader market.
O dividend yield data by YCharts.
You can reinvest dividends and compound that payout over time, or use the income to invest in other, faster-growing companies. Either way, this boring net lease giant can be a solid building block for you if your aspiration is to become a millionaire.
Sure, it is a get-rich-slowly type of investment, but that's not a bad thing at all. And when you do choose to retire, you can start using the money Realty Income throws off to pay for living expenses.
Sometimes it's better to be boring
Wall Street loves to jump on hot stories, often pushing stock prices to unrealistic heights. When that happens, the last investors through the door often get burned very badly, even though they bought in thinking they would get rich quick.
Boring companies like Realty Income are largely forgotten by investors even though they build material wealth, slowly, over time. While this REIT alone might not rocket you to seven figures, if you look at it as the foundation of a broader portfolio, it certainly can help you get there. That's particularly true if you buy it today, while it looks historically cheap.
