"You sure are lookin' good. You're everything a big bad wolf could want ..."
Of course I inserted "REIT" for "Red" in the title of this 1966 hit song, by Sam the Sham and The Pharaohs (Hey There Little Red Riding Hood). With all of the bargains hopping around in the world of REITs these days, I think it might be time to add a bunch of shares of Realty Income (O) to our own basket of dividend stocks.
REITs of all kinds have been hit hard during the recent market pullbacks. The Fed telegraphing that they "might" taper off on its QE policies have left many investors heading for the hills when it comes to these high yielding dividend superstars. The reason appears to be that investors fear that this sector will unwind, because it uses leverage to grow its business, and growth could be unsustainable in a rapidly rising interest rate environment.
Not all REITs are created equal of course and I believe some of the foundational REIT stocks have gotten caught up in the hammering of the mREIT sector. While the mREIT sector is just about a 100% play on financial products, most REITs invest in real estate and have actual customers that lease commercial property from them. The quality of the customer, or tenant, as well as the terms of the agreements, means that many REITs will thrive in just about any interest rate environment, as long as their income exceeds their borrowing costs to actually own the properties they lease out
This REIT Is "Lookin' Good"
I believe the most compelling REIT of all is Realty Income. I consider this stock the "best of breed" and if there is ONE stock to own "forever" in this sector it has to be O.
Realty Income: Price: $41.28/share, Dividend Yield: 5.35%, ESS Rating: Neutral
This company leases out commercial space to many of the finest retail/business chains in the contiguous USA and Puerto Rico. The combination of long term leases as well as the purchasing of properties with the very cheap money that has been available, gives O an opportunity to become even more profitable as the economy heals, business gains strength, and O could demand higher rents from existing tenants as well as new ones, going forward.
Just a few of Realty's tenants:
- WaWa Convenience Stores
- Texas Instruments (TXN)
- PNC Bank (PNC)
- Walgreen Drug Stores (WAG)
- Jack In The Box
- Super Stop And Shop
Per the company website:
"We purchase commercial real estate for cash leased to tenants that have a good business and operating track record. The leases are typically for 15 to 20 years, which provides us with dependable lease payments each month that are used to support monthly dividend payments to our shareholders."
This alone sums up this outstanding company's business. O's track record of monthly dividend payments has been nothing short of spectacular.
For 43 consecutive years, the company has paid monthly dividends without ever missing one payment, ever. Since 1994 (when the company went public) the company has increased dividends 72 times, and as of now has increased quarterly dividends 63 times in a row.
These are staggering statistics folks. The company even has a copyright on the name "The Monthly Dividend Company" because that is exactly what they have been, and will continue to be.
Why? As I already noted, as the economy continues to heal and grow, even at a gradual pace, Realty Income is poised to grow exponentially. Not just with existing leases, but with new properties, purchased at all time low interest rates, for new tenants, or even existing ones that intend on expanding.
Funds From Operations
(Chart from Dividendmonk.com)
As you can see from the chart above, funds from operations has grown and is growing consistently. As noted in this article:
Over three-quarters of the rental income comes from tenants in Retail, while the remaining quarter is split among Distribution, Office, Agriculture, Manufacturing, and Industrial properties. Currently, over 97% of the properties are occupied ... Revenue growth over this period has been a significant 13.6% per year on average, and Funds from Operations have grown at 10.9% per year on average over the same period.
The facts certainly speak for themselves, and obviously bodes well for the future of this wonderful company. Now, the stock is on sale!
This Stock Is A Red Tag Special
The recent drop in the sector has hit the share price of Realty Income just about as hard as any other REIT, and perhaps even harder. Given the fact that the stock had reached all time highs not too long ago, not only has there been "Fed fear" selling, but also profit taking.
On May 17th of 2013, the stock hit its all time high of $55.09/share and has since dropped by more than 25% to its current price of $41.28/share. In my opinion it has become quite oversold. Dividend income investors can now take advantage of a depressed share price as well as an increased yield of 5.35%.
The company now pays $2.18/share annually, on a monthly basis of course, to shareholders after another recent dividend increase, and with the drop in share price has "accidentally" popped over a 5% yield.
We already own shares of O in our Team Alpha Retirement Portfolio, and I am considering adding shares at the current price levels. For investors who do not have a position in O currently, now might be a wonderful opportunity to own this best of breed REIT that has not failed shareholders for over 40 years.
Disclaimer: The opinions of this author is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.