Which Do You Prefer?

| About: Realty Income (O)
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Realty Income (NYSE:O), The Monthly Dividend Company ©, is a stock with a large, some say cult-like following, both here on Seeking Alpha and in the broader market. It is a high-yielding REIT that aggressively promotes the fact that it pays a monthly dividend and has a long track record of consistently raising that dividend from quarter to quarter. While the common stock garners most of the attention, there are also two classes of preferred stock issued by Realty Income. In this short article, I will look briefly at Realty Income's common stock dividend history (as the company's own website and many other writers cover it well), the two classes of preferred stock, and my assessments and personal opinions on whether investing in the common stock or one of the preferred stocks would be most beneficial.

Realty Income Common, the Monthly Dividend Stock

In less than 20 years, Realty Income has grown to owning 3,866 properties in 49 states (all but Hawaii). The company pays a consistently increasing monthly dividend, as it must due to its status as a REIT. The most recent ex-dividend date was 31DEC2013 with a dividend of $.1821667 per common share. At the recent closing price on 1/17/14 of $38.41, this equates to an annual yield of 5.7%. Not too shabby. This also marked yet another quarterly increase in the dividend - this increase was $.0004 this month. While this is a very small amount, it follows on the heels of numerous large increases in 2013. Like most REITs, Realty Income was bid up very high in 2013 and also fell rapidly due to Fed actions and anticipation in the market for higher rates. That said, it still trades with a PE of 38, high in relation to the market but not out of line historically due to its following among dividend investors. With a 52 week high of $55.48 and a low of $36.58, most of the "froth" has been taken out of the common stock price, even at that seemingly high PE ratio.

But Wait, There's More! 2 Preferred Stock Classes!

Realty Income currently has two classes of preferred stock outstanding:

Classes of Preferred Stock as of January 2014

Class Par Current Value Yield Cumulative Redemption Date
E 25 24.75 6.8% Yes 12/7/2011
F 25 24.50 6.76 Yes 2/15/2017

The above table shows the basic information for the outstanding preferred stock. A few key items are quickly apparent. First, both classes trade near par value. No large discount but at the same time there is no premium risk. In addition, unlike many REIT preferred stocks, these are cumulative preferred stocks, which provide a margin of safety. Both classes yield more than 1% more than the common, with the most significant difference the call dates between the classes. The Class E preferred have now been trading past the redemption date for two years. The Class F preferred is not redeemable by Realty Income for another three years. Interestingly, the Class E traded 10% above redemption value/par value in the past 52 weeks!

So What Is the Better Position to Take?

As a REIT, the company must continue paying the dividend on the common stock-thereby negating the positive of the preferreds being cumulative. The decision for the Realty Income investor boils down to potential capital appreciation of the common compared to the narrow gap between the current price of the preferred shares and their par value. While all REITs are under pressure due to potentially higher interest rates, it appears Realty Income has already had this factored in, and a small movement in the stock of about $.40 would generate a total return equal to the preferred stock classes' yield. Unlike my investment in and analysis of Hersha Hospitality Trust (NYSE:HT) preferred stock, I am long Realty Income common and intend to remain in that position and not switch to the preferred. Realty Income displays more volatility and potential for capital gains based on history and following than Hersha does. Barring a massive rise in interest rates, I envision the stock increasing in value over 2014, thereby providing a greater total return than the preferred shares. Just to be fair in my analysis, an investor seeking to maximize current income without capital gains would get a higher yield in the preferred classes and not have premium risk as they are trading below par. Additionally, the odd (to me) fact that a redeemable preferred traded above par could re-occur, or the investor could buy the Class F for nearly the same yield. The preferred stocks would be a good choice to investigate if the increased yield was an investor's goal.

Disclosure: I am long O, HT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.