Realty Income (O -0.17%) is revered as one of the most reliable dividend-paying stocks in the market today. For nearly 30 years as a publicly traded real estate investment trust (REIT), Realty Income has provided investors with outsized returns compared to the S&P 500 while paying an attractive dividend yield and consistently raising its dividend payouts.
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This dependability is one of the reasons the stock has fared better than most other REITs amid market volatility. However, the stock is still down roughly 15% over the past year. Does this dip make Realty Income a buy? Let's take a closer look to see.
The case for Realty Income
Realty Income owns and leases single-tenant properties using long-term net leases of 7 to 10 years or more. Net leases pass most responsibilities on to the tenant, with built-in rent increases to help create a steady income for the company over long periods of time. This business model itself is part of the reason Realty Income has delivered solid returns and reliable dividends, but the REIT's portfolio size and diversity are what really set it apart.
At the end of 2022, the REIT owned over 12,200 properties across the United States and parts of Europe. The majority of its properties are in the retail sector, but the company has expanded its assets to include industrial real estate, and last year it added its first gaming resort. Realty Income's massive size and diversity in asset types, locations, and tenants gives it a competitive advantage, because if one tenant stops paying or a property becomes vacant, the REIT has tens of thousands of other leases to rely on for its income.
Realty Income boasts a top-notch credit profile, with an A credit rating and low debt ratios, and plenty of coverage for its monthly dividends. It also doesn't hurt that its dividend yield is more than three times the average of the S&P 500 at recent prices.
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The case against Realty Income
Net leases are set over long periods with small incremental rent increases, meaning the income the company earns remains relatively flat unless it continuously acquires new properties.
Realty Income spent billions growing and virtually doubling the number of properties in its portfolio over the last three years. Its massive expansion has been accretive to the company, growing its funds from operations (FFO) by 128% from 2020 to 2023, but continuing to grow may be challenging for the REIT.
Being big comes with lots of benefits, but it also makes it harder to maintain similar rates of growth as in the past. Moving the needle to achieve a 4% to 7% growth rate year over year will require billions in acquisition spend. The single-tenant retail market across the globe is massive, but it is a factor to consider in its long-term growth opportunities.
Is Realty Income a buy?
Realty Income's stock is down about 15% over the past year. At recent prices, it trades at around 15 times times its FFO. Most REITs trade at a multiple between 10 and 20, with the lower multiple indicating a better value. So Realty Income's price of 15 times its FFO is a fairly attractive valuation.
I believe Realty Income is a solid income stock for investors who want an attractive yield with reliable monthly income. While it may not be able to achieve the same growth it has over the past three decades, it will still grow slowly and steadily thanks to its built-in rent increase and acquisition efforts. Its dividend history, top-notch portfolio, and balance sheet make this a solid dividend stock to own.
