The Story Of 'O'

| About: Realty Income (O)
This article is now exclusive for PRO subscribers.


Realty Income offers a dividend approaching 5%.

The company just raised $350 million in debt at 3.90%, showing strength in the company's ability to issue debt at rates that keep the dividend safe and the company expanding.

Fitch Ratings assigned a "BBB+" credit rating to the senior unsecured notes due 2024.

With most U.S. equities fairly valued and stuck in neutral in 2014, and with bonds throwing off microscopic yields, investors are seeking options.

Buying real estate can be the third investment route, and public REIT stocks offer that choice plus the liquidity and passive ownership many investors seek. And REITs are known for dividends, which in the present low-yield environment might attract a growing following of former bondholders.

The Escondido, Ca.-based Realty Income Corp. (NYSE:O) is a dividend-hunter's favorite. Even in today's world of scorched-earth yields, the stock offers a 4.90 percent dividend. Not only is Realty Income's trading symbol a memorable oddity, but this diversified REIT pays out dividends monthly. Yes, monthly. You can almost see retirees checking the mailbox for the checks. Realty Income Corp. is a large-cap REIT, with a market capitalization of about $9.8 billion. Lately it has been trading at about 16 times expected earnings.

In addition to a lengthy track record of rising and monthly dividends, just this June 18, Realty Income announced it had raised $350 million in an unsecured bond offering, priced to yield 3.88 percent, in which Fitch Ratings assigned a "BBB+" credit rating. The short story is Realty Income proved it can borrow money at under 4 percent to grow its portfolio.

That borrowing power should allow an enviably steady record of dividend growth to continue in the future. The company already owns more than 4,200 commercial properties in 49 states, and Puerto Rico. It generally leases out space long term to name-brand tenants, the kind that don't disappear overnight. The company reports an occupancy rate of 98.3 percent, with a weighted average lease term of nearly 11 years.

The whole operation minimizes risk, which is one reason the company maintained its dividend even through the 2008 Great Recession, the worst economic downtown since the Great Depression. Unless there is a financial Armageddon ahead, this stock will pay its due, but at a higher yield than you get on a 10-year U.S. Treasury, now running around 2.5 percent.

Indeed, back on June 17, Realty Income announced its 76th increase in its dividend since the REIT went public in 1994, upping the payout by 144 percent in the last 20 years. The REIT has paid 528 consecutive dividend payments-it is money in the bank for shareholders.

With the U.S. Federal Reserve Board central bank evidently wed to very low single-digit interest rates for several more years, real estate promises to be an attractive asset class for the duration. When money is inexpensive to borrow, it almost necessarily follows that real estate will appreciate.

While the investing public certainly does not anticipate a jump in inflation (as seen in the low 10-year Treasury yields), the market has still not digested that interest rates may sag for many years to come. If and when the market realizes that inflation is dead for the duration, look for this stock to appreciate. In the meantime, collect the dividend.

A downside risk on Realty Income Corp. is that the world is glutted with capital; the competition to buy good-quality properties is intense. The company might be tempted to overpay for property, hurting both appreciation and yields in the future.

Still, compared to other very low risk options-such as U.S. Treasuries or municipal bonds-it is hard to come up with a better play than "O."

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.