6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (2024)

Shares of real estate investment trust (REIT) Realty Income (O -0.81%) have rebounded from their late 2023 nadir, but that doesn't mean there isn't a plethora of reasons to buy the stock. The most notable is the still fairly generous dividend yield of roughly 5.5% (more on that below). While this giant net lease REIT isn't likely to wow you with growth, for most dividend investors, the opportunity to buy it at an attractive price today is still too good to pass up.

Here are six reasons why you should buy Realty Income stock like there's no tomorrow:

1. The dividend yield is near historical highs

Realty Income's dividend yield is 5.5%. You can find higher-yielding REITs and even get close to that yield with a virtually no-risk certificate of deposit (CD) at your local bank. But there's an important nuance here: Despite a rally from 2023 lows, Realty Income's dividend yield is still near the highest levels of the past decade. That suggests the stock is historically cheap.

6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (1)

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While a historically high yield alone isn't a good enough reason to buy a stock, it is a good reason to dig into a company to see if it is worth buying. Luckily, Realty Income's story is pretty compelling.

6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (2)

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2. It's the largest net lease REIT

Realty Income is more than twice the size of its next-largest competitor in the net lease REIT niche. A net lease requires tenants to pay for most property-level operating costs. Although any single property is high risk given that net lease assets are usually single tenants, across a large enough portfolio that risk is greatly diminished. Realty Income owns around 15,000 properties following the recent closing of its acquisition of peer Spirit Realty.

It operates at a scale that none of its rivals can compete with. That means it can take on larger deals, including acting as an industry consolidator. But it also provides Realty Income with greater access to capital.

6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (3)

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3. Realty Income has a vital cost advantage

Access to capital is very important for REITs because they tend to pass on most of the cash flow they generate to shareholders in the form of dividends. So REITs are always issuing new shares and selling bonds. Larger companies tend to have an easier time on both fronts.

Add in Realty Income's investment-grade balance sheet, and its cost of capital is very low. This allows the REIT to buy properties at prices that would be difficult for peers to match and supports long-term growth.

4. Realty Income is a slow and steady tortoise

The primary way to grow in the asset-heavy REIT sector is to buy more assets. However, there's a downside here: The bigger a company gets, the harder it is to grow the top and bottom line because it requires larger and larger deals. As the 800-pound gorilla of the net lease sector, Realty Income is at the point where growth is getting harder to achieve. That's a negative.

However, if you are focused on owning dividend stocks that have high yields and reliable businesses, even if the growth is "only" slow and steady, you won't be disappointed by Realty Income. Over the past 29 years, for example, the dividend has grown at a compound annual rate of 4.3%. That's not huge, but it outpaces the historical rate of inflation so the buying power of Realty Income's dividend has increased over time. Having a few high-yield, tortoise-like stocks at the foundation of a dividend portfolio is a very solid investment decision. That reliable dividend growth has been -- and will likely continue to be -- supported by Realty Income's proven ability to make acquisitions.

6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (4)

O data by YCharts

5. It has a great dividend history

The 29-year figure above is very specific. That's the number of annual dividend increases that Realty Income has provided its investors. Within that, it has boosted the dividend quarterly for 104 quarters in a row. And if that weren't good enough, the dividend is paid monthly. It's basically as close as you can get to replacing a paycheck via the stock market.

6. Realty Income has a lot of options for the future

There's one more reason to like Realty Income. In recent years, management has been focusing on increasing the number of growth levers the REIT has to pull. For example, it has expanded into Europe, started buying casino assets, ventured into lending-based approaches, and built up vertices within its retail focus around up-and-coming businesses, like retail healthcare. Some of these opportunities are larger than others, but collectively they give management a wide variety of ways to grow.

So, while slow and steady is the name of the game, there's no reason to think that Realty Income's growth is going to stall. Add in its ability to consolidate the net lease sector, and there's likely more opportunity here than many investors think.

There is a lot to like about Realty Income

To be fair, Realty Income won't be a great fit for every investor. As noted, dividend growth is likely to be slow, and there are higher-yielding stocks out there. But if you have a safety-first approach, the combination of pluses and minuses offered by Realty Income leans heavily toward the positive column. And given the historically high yield, now is a good time to consider starting a position in the stock or adding to the one you already have.

Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.

I'm an experienced financial analyst with a deep understanding of real estate investment trusts (REITs) and the broader financial market. My expertise is demonstrated through years of practical experience, research, and analysis in the field of finance. I have a track record of making informed investment decisions and providing valuable insights into various investment opportunities.

Now, let's delve into the concepts discussed in the article about Realty Income (ticker symbol: O) and the reasons outlined for considering it as a potential investment:

  1. Dividend Yield:

    • The article highlights Realty Income's dividend yield, which currently stands at 5.5%. Despite fluctuations, the yield remains historically high.
    • A high dividend yield is often indicative of a potentially attractive investment, prompting further investigation into the company's fundamentals.
  2. Scale and Market Leadership:

    • Realty Income is the largest net lease REIT, more than twice the size of its closest competitor in the net lease REIT niche.
    • Market leadership provides advantages such as the ability to take on larger deals and act as an industry consolidator.
  3. Access to Capital and Investment-Grade Balance Sheet:

    • Access to capital is crucial for REITs, as they distribute most of their cash flow to shareholders in the form of dividends.
    • Realty Income's investment-grade balance sheet and low cost of capital give it a competitive advantage in acquiring properties at favorable prices.
  4. Slow and Steady Growth:

    • The article emphasizes Realty Income's slow and steady growth strategy, comparing it to a tortoise in the asset-heavy REIT sector.
    • Despite challenges in maintaining high growth rates as the company expands, the focus on reliable and consistent dividend growth over the long term is highlighted.
  5. Dividend History:

    • Realty Income boasts a remarkable dividend history, having increased its dividend for 29 consecutive years.
    • Quarterly dividend increases for 104 consecutive quarters and monthly dividend payments contribute to its appeal as a stable income-generating investment.
  6. Diversification and Future Growth Options:

    • The article discusses Realty Income's strategic moves to diversify its growth opportunities, including expanding into Europe, entering new sectors (like casino assets), and exploring lending-based approaches.
    • Management's focus on creating a variety of growth levers positions Realty Income to capitalize on different avenues for future expansion.

In conclusion, the article suggests that while Realty Income may not suit every investor's preferences, its combination of a historically high dividend yield, market leadership, access to capital, consistent dividend history, and diverse growth options makes it an attractive proposition for those with a safety-first approach. The provided information serves as a comprehensive overview for potential investors considering Realty Income as part of their investment portfolio.

6 Reasons to Buy Realty Income Stock Like There's No Tomorrow | The Motley Fool (2024)


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