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Realty Income: An Overpriced SWAN Stock

Feb. 12, 2019 7:00 AM ETRealty Income Corporation (O)73 Comments


  • Realty Income is one of the great SWAN stocks of our time, but at current levels, it does not look enticing.
  • The stock is trading with a yield of 3.79%, which is the lowest level since 2016.
  • Though Realty Income is the clear leader in the space, and a top holding of ours, we prefer others in the space.
  • Looking for a portfolio of ideas like this one? Members of Dividend Growth Edge get exclusive access to our model portfolio. Get started today »

It sounds like an oxymoron, "An Overpriced SWAN Stock", but that is exactly how far ahead of itself Realty Income's (NYSE:O) stock has gotten today. Do not get me wrong, Realty Income is one of the safest places to invest your money, but at current prices, we prefer others in the triple-net lease REIT space. From purely a valuation perspective, Realty Income is too pricey.


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The Making Of The Ultimate SWAN Stock

Realty Income has long been one of the safest investments for all types of investors. The name has long been a saving grace during difficult times for investors as they can look forward to their growing monthly dividend checks over the years. In addition, the S&P 500 limped to the finish line in 2018 with a total return of -6%, while Realty Income plowed ahead for a return of 16% as seen in the chart below.

After a flat 2017, in which Realty Income returned only 4% compared to the S&P 500 returning 19%, REITs began to pick up steam into 2018 and saw strong momentum for much of the year in 2018. As confidence in the US economy turned dire at the end of 2018, investors were selling EVERYTHING under the sun, but eventually turned to REITs for safety.

REITs in general have continued to have a solid run into the new year, as the Fed has seemed to have paused on its rate hikes for the foreseeable future. Be sure you hear me out completely, as we are big proponents of the company as a whole, but what this piece will do is explain why we do not recommend buying shares at current prices. Without taking valuation into consideration, this company is rock-solid and deserves a position in every portfolio, at the right price. Before we get into valuation, let's take a look

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This article was written by

Mark Roussin profile picture

Mark Roussin is an active Certified Public Accountant (CPA) in the state of California. Mark has worked as a CPA, serving both public and private Real Estate corporations for over 10 years. Today, he provides his followers insights to both undervalued dividend stocks mixed with high-growth opportunities with a goal of them reaching financial freedom in the long-term. Mark tends to invest primarily in dividend stocks with a strong emphasis on Real Estate Investment Trusts (REITs).

Mark has partnered with iREIT on Alpha, one of Seeking Alpha's top investing groups for income-minded investors, providing daily in-depth REIT research. The service boasts a community of like minded investors and offers access to iREIT's various portfolios that can be tracked in real-time. Learn More.

Analyst’s Disclosure: I am/we are long O. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (73)

Bucknfl profile picture
Hold, collect div, pay bills, repeat
I recently sold 25% of my position In reality income. I also think it is a great stock to own but at an entry cost of 44.00 I made 26 dollars a share on it which would be about 10 years of dividends. I have every intention of buying it back the next time powell says something to upset the market and it drops back down 10 or 15%. long time holder of this swan but everything has a fair value.
Mark Roussin profile picture
@8202371 well played! $44 would be a nice entry cost, but we are a long ways from that. We will see what happens. Best of luck, Big Ticket!
muskellunge55 profile picture
If I wouldn’t buy O at this price, why should I hold it at this price? Holding it at this price IS buying it at this price. I could sell it and buy anything else that is a better value. As a matter of fact, when it hit $70, I trimmed it and bought a higher dividend stock and plan to trim it again this week and buy BEP, a highly regarded stock with a 7% yield. I’ll keep a good chunk of O simply because I get a warm, fuzzy feeling from owning it and mistakenly think I’ve made money from it when I actually haven’t made any money until I sell it.
Mark Roussin profile picture
@muskellunge55 that is not true at all. Their are tax implications to factor in with selling plus yield on cost could be much better than current yield, so holding is completely different than selling. It all depends on an investors cost basis.
muskellunge55 profile picture
This is in an IRA so there are no tax consequences. Cost basis is absolutely meaningless and I never give it a thought unless I want to pat myself on the back. What is important is you now have the stock and if you decide to hold it you are in effect buying it at today’s price. You have the option of selling it and buying any other stock in the market, but you’ve decided to keep it at this price.
Mark Roussin profile picture
No, sorry, I do not look at it that way, but best of luck to you.
Booban profile picture
Yes, we know its a good stock, but why exactly at this time has it gotten so high?
Why not?
Booban profile picture
Because others have said O performs poorly when interest rates rise? For a short while it did.
I don't listen what "experts" saying. What interest rise?
Live Hard Investing profile picture
Wow. O is staggeringly overpriced right now. I didn't realize it had gotten so high.

I'm not a short seller, but if I were I'd probably think about this. Odds are very high it gets a 20%+ haircut over the next 6 months.
O is not AMZN or GOOGLE to be overpriced. Don't forget, next dividends and next dividend raise are coming.
I know the price is high but bought it anyhow thus guaranteeing it will drop and be cheaper for the rest of you.
Cuip99 profile picture
Yes, I am in "hold" regarding O. Actually, I am not a trader, I am an investor. And my investment is paying off for me. And in the case of O, it does so monthly. Cha-ching!
I would like to add more of O in the future. Do you guys think we'll see this one back in the 50's during the next down turn?
O is a dividend stock and if you bought it at $30 and hold it, you'd be doing just fine! :-) They pay that divvy like clockwork and it goes right into your checking account. :-)
Basis of $53.50 bot 13 months ago, looking at a chart, it may take more willpower than I have to not sell it right here.
thanks for the info in total agreement

Holding but not adding or selling and am very happy with the results

I will never sell until management starts making bad decisions
don't expect any in the near future

long on O since 07/24/15

purchased 11 different times including drips

basis $52.07

core holding 8.49% of my 21 stock portfolio 2nd largest holding

In 38 years of investing, selling (profit taking ) never seems to work for me. I have watched my portfolio drop 50% at times. Then recover to new highs with in months sometimes a little longer. Patience to do nothing can be very hard on ones psyche. Doing nothing usually is the correct decision. IMHO
Mark Roussin profile picture
@buffalobobz great comments and it sounds like we are it agreement. Solid basis you have in the stock as well. All the best, Big Ticket!
Similar numbers to you, buff. I bought in with several purchases over the last two years, averaging my price to $52.50. Except I sold it all at $68.80 a few weeks ago. Securing a $16+ profit per share lets me sit on the sideline for a long time missing monthly payments waiting for a lower price to buy back in at.

Ask the question this way: At the current $0.225/month dividend, it takes 9 months to miss $2 of dividend payments. Do you think the stock price will fall at least $2 in the next 9 months? I've bet that it will.
Booban profile picture
Thanks for that 9 month calculation!
John_Tierney profile picture
You don’t get wealthy sitting on the sidelines in cash. Your article is wrong the yield is 3.87% too
Mark Roussin profile picture
@John_Tierney do know the article is written a few days before the publishing date. Its not a "real-time" yield tracker within the article. Also, never mentioned we were sitting in cash, just not adding to O shares. Best of luck, Big Ticket!
nsolot profile picture
I hear ya loud & clear....

That said, every time I sell some O, I end up kicking myself in da butt down the road. It's the power of those ever increasing dividends, I suppose.
Booban profile picture
Sounds like me. But did you buy it again? I sold a bit at 70.5 but not much, with intention of buying at 55-60 again.
nsolot profile picture
Yes & No.

A) In my personal account, I sold O and chased a higher yielding REIT. Learned my lesson.

B) In an endowment I manage, sold some call options against a portion of the O, and the first 2 times, they expired, but the 3rd time the stock got called away. I bought O again, some at lower price than the option strike, some at higher price.

C) In an endowment I advise, but do not have trading authority, my suggestion to sell call options was not implemented. Today that account has a very large position in O at a basis of ~ $35.

In hindsight, C was the right (smart) choice... just leave O alone and collect the dividends... and watch the shares appreciate.
Booban profile picture
@nsolot yeah. Because now Im sitting with some cash I dont know what to do with. Thats the problem with selling. Now you have to make the right decision again.
Most REITs have had a run up and are fairly valued or over valued now: O, VTR, WPC, STOR, NNN, and many others.
Mark Roussin profile picture
@alschroed I agree, it is getting more difficult to find some well priced REITs, but they are out there. Best of luck, Big Ticket!
Might be wise just to stockpile cash and wait.
Divvy is on the low side but the money is made by the
stock movement up and I see it continuing.
Thomas Yeggy profile picture
Selling 65 calls for a nice payday that provides downside protection.When yield goes below 4% look to sell calls
Mark Roussin profile picture
@Thomas Yeggy interesting, not a bad strategy. Is this something you have done for awhile? What premium did you get?
Agree. I sold the March 72.50 calls and picked up a month and half "extra" dividend. I expect they will expire worthless
proper way to make money off an overpriced stock in a portfolio that you already own. Does not hurt to take in some premiums.
porky11 profile picture
Agree - on the sidelines at these levels but it’s a sleep-well-at-night holding.
Mark Roussin profile picture
@porky11 on the same page with you. Not selling, just not adding.
gmen14503 profile picture
I concur.
Bronco Fan profile picture
I agree it is overpriced. Just don't tell Brad Thomas.
Mark Roussin profile picture
@Bronco Fan Shhhhhhh...... Thanks for the comment!
dunkmaster profile picture
Bronco Fan....you don't follow Brad as close as you should if you are going to report on his opinions. This from his latest comment in another thread....

"[O] - Getting pricey for sure, and we just hit the trim button....but my kids and (future) grandkids will likely ALWAYS have O to help them SWAN....."GOD BLESS AMERICA" back at ya! All the best. B"
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