Realty Income offers an unusually generous but sustainable payout.
It offers a strong, stable portfolio of revenue-generating properties.
Realty Income is arguably more undervalued than most investors may assume.
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Realty Income (NYSE: O) may not look like a particularly attractive buy at first glance. The stock currently sells for approximately 30% below its peak in February 2020, meaning it never recovered from the pandemic challenges. Additionally, high interest rates appear to have deterred investors from purchasing the stock.
Nonetheless, a closer inspection of the stock may actually signal opportunity instead of continued struggles. Investors may want to consider buying like there is no tomorrow for three key reasons.
Image source: Getty Images.
Realty Income is defined in large part by its dividend. Part of that is due to the fact that it is a real estate investment trust (REIT), which requires it to pay at least 90% of its net income to its shareholders in the form of dividends.
It bills itself as “The Monthly Dividend Company,” and it has paid a dividend every month since November 1994. That dividend has also increased at least once per year since then. Over the past 12 months, the company has approved five dividend increases.
That amounted to a cumulative yearly rise of just 2.3%, increasing what was already a generous payout. The annual dividend of almost $3.23 per share amounts to a dividend yield of nearly 5.6%. To put that into context, the average S&P 500 dividend yield is just over 1.2%.
Realty Income can probably afford this dividend. Over the trailing 12 months, the company reported funds from operations (FFO) income of $4.12 per share. With the company paying just over $3.15 per share in dividends during that time, it leaves cash for share repurchases or acquiring additional properties.
Realty Income’s property portfolio also speaks to the company’s stability, as it owns approximately 15,600 single-tenant properties. The REIT leases the properties under net lease arrangements, meaning the tenants cover the insurance, maintenance, and property taxes, providing the company with a more stable stream of revenue.
Additionally, the company benefits from the fact that many companies prefer to lease their real estate, freeing up capital for other purposes. Such tenants include Walmart, Home Depot, and Tractor Supply, all of which have long-term track records of stability and profitability, ensuring that default rates remain low.
The occupancy rate of these properties was 98.5% in the first quarter, meaning nearly all of its holdings generate revenue. This has prompted it to grow through acquisition, and in 2024, it added more than 2,000 properties to its portfolio by acquiring its peer, Spirit Realty. Moreover, in Q1, Realty Income purchased 50 properties and had an additional 71 under development, demonstrating its continued expansion.
Realty Income is currently trading for approximately 30% below its all-time high reached in early 2020. Like most other stocks, it initially fell that year because of the pandemic. It rose after that brief sell-off until rising interest rates interrupted its recovery, and the latest efforts to recover have only come slowly.
Indeed, higher interest costs seemed to have lowered its bottom line. Nonetheless, interest rates were not high enough to stop Realty Income from acquiring and developing properties, including the aforementioned Spirit Realty acquisition.
Furthermore, Realty Income comes with a surprisingly low valuation. On the surface, the P/E ratio of 53 makes it look pricey. However, FFO income over the trailing 12 months was $4.12 per share, implying it sells at a price-to-FFO ratio of just 14. Between its low valuation and high dividend yield, the stock offers much to income and possibly growth investors as interest rates fall.
Despite long-term struggles, Realty Income may be a surprisingly lucrative buy.
A continually rising dividend has translated into high income returns, even when factoring in the stock’s struggles. Moreover, an extensive property portfolio with a low default rate makes the stock and its dividend very stable. Additionally, the stock appears attractively valued when measured by its FFO income.
High interest rates have weighed on the company’s financial and stock performances. Still, as such worries recede, investors can not only benefit from a generous dividend, but could also bolster returns with stock growth as more investors see Realty Income’s value.
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Will Healy has positions in Realty Income. The Motley Fool has positions in and recommends Home Depot, Realty Income, Tractor Supply, and Walmart. The Motley Fool recommends the following options: short July 2025 $54 calls on Tractor Supply. The Motley Fool has a disclosure policy.
3 Reasons to Buy Realty Income Stock Like There’s No Tomorrow was originally published by The Motley Fool
