It is often suggested that Wall Street is efficient in the way it prices stocks. That's actually true over long periods of time, but over short periods, investors can be quite emotional. This emotionality can open up buying opportunities for investors who focus on the long term.
Right now could be a good time to take a contrarian stance and buy Realty Income (O +0.59%) and PepsiCo (PEP +0.38%), which both appear to be trading at absurdly cheap prices. Here's why you might want to go against the crowd.
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Realty Income has a proven model
Realty Income has increased its monthly pay dividend every year for 30 consecutive years. That's an impressive streak and highlights the consistency of this 5.5%-yielding real estate investment trust (REIT). The dividend was increased right through the dot-com crash, the Great Recession, and the coronavirus pandemic.
NYSE: O
Key Data Points
The big story here is Realty Income's single-tenant net lease approach. A net lease requires the tenant to pay for most property-level expenses. While any single property is high-risk because there is only one tenant, across a large portfolio, the risk is relatively low. That's because Realty Income avoids the cost and effort involved with maintaining its properties.
Realty Income is the largest net lease REIT, with a portfolio of more than 15,500 properties.The vast majority of its assets are retail, accounting for approximately 80% of its rents. Single-tenant retail properties tend to be very similar, making them easy to buy, sell, and re-lease.
The remaining 20% of rents comes from industrial assets and more unusual properties, such as casinos and data centers. This adds some diversification to the mix, which is further augmented by the roughly 18% of rents that come from Europe. More recently, Realty Income has agreed to an acquisition that will see it expand into Mexico.
The conservatively run REIT is basically built to be a boring, diversified dividend machine. It's currently a great time to consider buying it, given that the shares are 20% below their 2022 highs. If you think in decades and not days, that's too attractive an entry point to ignore. Five hundred dollars will let you buy eight shares of Realty Income.
PepsiCo is lagging, and that's good for you
PepsiCo's stock is down more than 25% from its 2023 highs. The 4% dividend yield is near the highest levels in the company's history. To be fair, this food and beverage maker isn't hitting on all cylinders right now, so investors are just reacting to its recent financial performance. However, PepsiCo is also an industry leader and a Dividend King.
PepsiCo's beverage, snack, and packaged food business is, literally, one of the world's largest consumer staples operations. It boasts a strong brand portfolio, distribution capabilities, marketing expertise, and innovation skills that rival any competitor. A strong business model that's executed well in both good times and bad is how it managed to build an over-50-year streak of annual dividend growth. It is, without question, a very good business. It's just going through some hard times right now.
NASDAQ: PEP
Key Data Points
That happens to every company. The long-term winners figure out a way to muddle through to better days. PepsiCo is working on that right now. For example, it has been acquiring new brands that resonate well with consumers. It's also working with an activist investor to reinvigorate the business, which may include adjusting its beverage business model to make it more similar to that of industry leader Coca-Cola.
The problem is that the moves PepsiCo is making aren't short-term fixes, which is what Wall Street really wants to see. PepsiCo is making strategic decisions with a long-term focus. If you think in decades and not days, that should be music to your ears. This could be your chance to buy a high-yield Dividend King while it appears absurdly cheap, with a $500 investment netting you three shares.
Don't wait too long -- investors will eventually catch on
Short-term price dislocations, such as the ones that appear to have taken shape at Realty Income and PepsiCo, usually don't last forever. As companies like these two industry leaders prove again why they are leaders, investors tend to come back and buy the stock. That's why you'll want to take the time to get to know them. If you wait too long, you may miss the opportunity to buy Realty Income and PepsiCo while they look like they are on sale.
