'FANG,' Meet Your Low-Volatility Cousin: 'ROCK' - Part 2

| About: Realty Income (O)

Summary

I created a group of stocks with low volatility using the acronym "ROCK".

Each selection has low volatility, a higher dividend yield than the S&P 500, a long history of dividend growth and has outperformed the S&P 500.

This is part two where I focus on the "O" in "ROCK".

This is the second article in my series covering my new group of low volatility stocks collectively known by the acronym "ROCK". As I noted in my first article, I selected stocks using a number of fundamental factors like low volatility, dividend size and dividend-growth. Specifically, to be considered for my group the stock must be classified as low volatility, have a dividend yield higher than the S&P 500 and have at least ten consecutive years of dividend increases. In addition to those criteria, potential candidates must have outperformed the S&P 500 over the last 1, 3 & 5 year periods.

Part 1: The "R" in Rock: Raytheon (NYSE:RTN)

Realty Income: The "O" in "ROCK"

Realty Income (NYSE:O) is a real estate company that owns commercial properties in almost every state and is focused on leasing to tenants that operate retail stores providing non-discretionary goods and services. As the following chart shows, Realty Income has high quality tenants in stable businesses that are not at risk of the declines seen from fellow REITs who own mall properties. No matter the economy, people will still buy prescriptions, etc., at Walgreen's (NASDAQ:WBA), Rite Aid (NYSE:RAD) or CVS (NYSE:CVS), consumers will still shop at dollar stores, and FedEx (NYSE:FDX) will continue to ship packages with the support of ever-increasing e-commerce growth.

Realty Income Company Overview

Realty Income in its most recent earnings report painted a bright picture for the future of the company. In the report, the company noted, "We continue to see an active pipeline of investment opportunities and are therefore raising our 2016 acquisitions guidance to approximately $900 million from our initial estimate of $750 million." This shows that they see plenty of opportunities to acquire new quality real estate over the rest of the year. In addition, Realty Income noted that during the 1st quarter they had 9 leases to new tenants of properties where leases had expired. In the earnings report, they stated, "The annual new rent on these re-leases was $6,076,000, as compared to the previous annual rent of $5,421,000 on the same properties." The new annual rent from those existing properties is 12.08% higher than the previous rent for those properties. This shows that as leases expire, Realty Income is able to increase rents on the same retail space to new tenants.

Performance Data Table

1-Year Return

3-Year Return

5-year Return

SPY

0.24%

39.27%

80.54%

O

46.53%

78.75%

139.71%

[Data in table is total return, from Dividendchannel.com]

Realty Income performance during worst stock market days

Since the beginning of 2015, there have been 11 days where the S&P 500 has fallen at least 2%. The average performance of the S&P 500 was down 2.58 vs. down 0.91% for Realty Income, which is the best performance of the companies that make up ROCK. Out of those 11 big down days for the S&P 500, Realty Income outperformed each of those days; therefore, Realty Income has shown itself to be a place where investors can hide from big down days in the market. What is interesting is that Realty Income actually posted gains on three of the days when the S&P 500 was down more than 2%.

Date

% Return

Date

% Return

SPY

6/29/2015

-2.10%

O

6/29/2015

-1.27%

SPY

8/20/2015

-2.09%

O

8/20/2015

0.10%

SPY

8/21/2015

-3.11%

O

8/21/2015

-0.99%

SPY

8/24/2015

-4.09%

O

8/24/2015

-3.78%

SPY

9/1/2015

-2.98%

O

9/1/2015

-1.68%

SPY

9/18/2015

-2.14%

O

9/18/2015

1.28%

SPY

9/28/2015

-2.51%

O

9/28/2015

-0.89%

SPY

12/18/2015

-2.36%

O

12/18/2015

0.15%

SPY

1/7/2016

-2.40%

O

1/7/2016

-1.74%

SPY

1/13/2016

-2.49%

O

1/13/2016

-1.13%

SPY

1/15/2016

-2.12%

O

1/15/2016

-0.11%

Average

-2.58%

Average

-0.91%

Realty Income Dividend

Currently shares of Realty Income have a 3.72% yield, which is nearly 1.7% higher than the 2.07% yield on the S&P 500. Realty Income pays a monthly dividend; however as Realty Income notes on its website, it has increased its quarterly dividend total for 75 consecutive quarters. This represents nearly 20 straight years of quarter/quarter dividend increases. Even with the real estate bust, Realty Income was able to increase it dividend, which shows the strength of its business, in its ability to not just maintain but increase its dividend during that time of great market stress.

Dividend Growth Potential

As you can see in the table below, Realty Income has a weighted dividend growth rate of 4.18% and I expect the dividend to continue growing over the next 5 years. While this is not a blistering rate of dividend-growth, for Realty Income, slow and steady wins the race. My usual test to determine if the rate of dividend growth is sustainable over the next five years is to see if dividends paid as a percentage of CFFO was less than my self-imposed threshold of 80%. However, REITs are their own category; therefore, the 80% upper threshold will be excluded from Realty Income because it is a REIT. For my calculations, I used the dividend growth rate of 4.18% and used projected long-term growth data from Zacks. Based on my estimates in the table below, by 2020, Realty Income could be paying an annual dividend of $2.81/share or about $0.234/month, which is 17.81% above the current monthly dividend.

Div Growth Rate

Weight

Div Rt*Weight

5 Yr

7.03%

20.00%

1.41%

3 Yr

2.34%

30.00%

0.70%

1 Yr

4.15%

50.00%

2.08%

Weighted Dividend Growth Rate

4.18%

Current Quarterly Dividend

0.199

Shares Outstanding

250.7

LT Growth Est. [Zacks]

3.45%

Calendar Year

Est. Div/Share

Shares

Divs $ Paid

Proj. CFFO

Proj. Div as % of Net Inc.

2016 est.

2.39

250.7

598.67

715.87

83.63%

2017 est.

2.49

250.7

623.72

740.57

84.22%

2018 est.

2.59

250.7

649.81

766.12

84.82%

2019 est.

2.70

250.7

676.99

792.55

85.42%

2020 est.

2.81

250.7

705.32

819.90

86.03%

`

2020 Div

2.813

2020 Monthly Div

0.234

Current Monthly Div

0.199

% Dividend Upside

17.81%

Closing Thoughts

In closing, Realty Income is the second selection of my group of "ROCK" stocks that have low volatility, a high dividend, a history of dividend increases and which have outperformed the S&P 500 over the last 1, 3 & 5 years. Stay tuned for part 3 to find out what stock is the "C" in "ROCK".

Disclaimer: See here.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in O over the next 72 hours.

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.

Additional disclosure: I may purchase Realty Income common or preferred stock sometime in the future.

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