Notable Dividend-Rich Share Lower by 29%, Worthy of Long-term Investment and Holding
The S&P 500 is almost at its all-time high, but not every sector within the stock market is shining equally bright. In fact, the real estate sector has significantly lagged behind the market's average performance for the past three years, primarily due to high-interest rates.
This economic climate has gifted astute investors with an excellent chance to bolster their portfolios by adding robust real estate investment trusts (REITs). One such opportunity lies in Realty Income (O, up by 1.01%), which is currently approximately 29% below its peak, despite delivering solid financial results.
Realty Income's Basic Business Breakdown
Realty Income is a renowned real estate investment trust (REIT, pronounced "reet") that specializes in net-leased properties. In simpler terms, it owns properties that are occupied by individual tenants who are responsible for taxes, building insurance, and most maintenance expenses.
At present, Realty Income manages about 15,500 properties, with approximately 80% occupied by retail tenants. This includes popular chains like dollar stores, drug stores, warehouse clubs, and home improvement retailers, among others. It also owns a modest percentage of industrial, gaming, and agriculture properties. Recently, it has partnered with Digital Realty Trust (NYSE: DLR) to expand its business into data centers.
A Fortified and Resilient Business
Despite Realty Income's stock price dwindling by roughly 30% since its all-time high (early 2020), the company's business performance has stood strong. In the latest financial quarter, Realty Income generated $1.05 per share in adjusted funds from operations (AFFO), which is essentially the real estate equivalent of earnings per share. The portfolio's occupancy rate remained impressive at an impressive 98.7%.
Interestingly, during the comparable quarter of 2019 (just before the all-time high), Realty Income's AFFO was $0.83 per share, and the company owned a lesser number of properties (5,964). In addition, portfolio occupancy was only 98.3%, which was marginally lower than the current rate.
Multiple Openings and a Tradition of Success
As the largest REIT in its niche, Realty Income certainly has room to grow, even in the United States, where the net lease real estate market for its property types spans an estimated $5.4 trillion, only 4% of which is owned by public REITs. Europe's market is even more extensive and underpenetrated by REITs. Thus, Realty Income has substantial potential for expansion.
The evidence of this business model's success can be seen in its track record. Since 1994, Realty Income has delivered an impressive 14.1% annualized total return, outshining the S&P 500. It has also been a valuable income stock, having declared a record-breaking 129th dividend increase since going public, without ever reducing its payout, even during turbulent economic conditions.
An Enticing Entrance Point
Realty Income's current dividend yield hovers around 5.7%. Historically, this has been a highly attractive entry point for long-term investors. The last time Realty Income's dividend yield approached 6% was in early 2014. During the ensuing six-year period, Realty Income provided annualized returns of over 17%.
Though this is not a guaranteed forecast for the future, the essence of this business is strong and offers profitable returns for investors who purchase when yields are high.
- Despite the S&P 500's high performance, investing in certain sectors, such as real estate, has underperformed due to high-interest rates.
- In the finance world, astute investors see opportunities in underperforming sectors, like real estate, to strengthen their portfolios by investing in robust real estate investment trusts (REITs).
- Understanding the types of investments involved, Realty Income is a REIT that specializes in net-leased properties, managing properties occupied by tenants responsible for taxes and most maintenance expenses.
- Sensitive to market conditions, Realty Income's business performance has remained resilient, even if its stock price has underperformed relative to its highs, generating strong financial results and maintaining a high occupancy rate.
