Realty Income Corp Enhancing Income

Summary

• Realty Income is one of the most popular REITs.
• They are about to pay their 609th consecutive monthly dividend.
• It might be a slow grower, but that's all income investors need.

Republishing from Substack - original article published there. Feel free to subscribe and get all updates when I publish blogs there. We've been covering a lot of options writing - though I've also touched on some other dividend growth stocks too.

Realty Income Corp (O) is quite well known in the dividend investing arena. They are dedicated to their monthly dividend and they have a proven track record. They are a slow grower, but that is fine for most investors with an income focus.

The last dividend they declared was a 0.2% increase from the monthly payment of $0.02345 to $0.235. Though a small increase, they increase it more regularly than just once per year. The stock is also yielding about 4.41% right now so it is a rather generous rate in the first place.

"We remain committed to our company's mission of paying dependable monthly dividends to our shareholders that increase over time," said Sumit Roy, President and Chief Executive Officer of Realty Income. "Our Board of Directors has once again determined that we are able to increase the amount of the monthly dividend to our shareholders, marking the 110th increase since our company's public listing in 1994. With the payment of the April dividend, we will have made 609 consecutive monthly dividend payments throughout our 52-year operating history."

609 consecutive monthly dividend payments is quite the record. I don’t suspect this record to be broken anytime soon either.

(Source - O Presentation)

The biggest headwind for O at the moment I believe is interest rate fears. As a REIT, it is competing with other income-producing investments. Therefore, when rates rise on other less risky assets - it makes the appeal of O just a little less appealing. Primarily because it is an equity security and can be quite volatile and carries common stock risk.

(Source)

I’m already long the shares of O - though I’ve just committed to potentially be even longer on the shares. Here was the trade and the premium collected.

I wrote puts against the April 16th expiration date at a strike price of $62.50. I collected $1.16 per contract or $116. Essentially this is risking $6250 per contract total if O goes to $0 between now and the expiration. Though the breakeven would also be reflecting the $1.16 we collected. That comes down to $61.34 - essentially meaning that losses would start after this level was breached. Though if we are put the shares nothing is forcing us to sell at losses.

If we were able to do this same exact trade throughout the next year, it would work out to an annualized return of 23.36%. For me, my minimum is right around collecting 15% annualized for any written options.

(Source - Google Finance)

Fidelity does show that there is a good chance that the price could fall below that strike price. Though a larger probability that it will be above as well.

(Source - Fidelity)

Therefore, there is a good possibility that I’ll be holding additional shares of O in about a month. At which time, we can turn around and start seeing if there are any covered calls worth writing. It is a bit harder with O since they don’t have weekly options, so options, literally, are limited.

The biggest risk here for O itself is interest rate sensitivity as touched on. However, for this trade, the stock will also go ex-div date on 3/31/2021. That means the share price will be adjusted (lowered) on that date. So right there it ends up pushing us closer to our strike price. Additionally, at 29 days out anything can happen. In a market that trades day to day - that could be an eternity.

The way I look at it, those being the worst-case scenario isn’t terrible. I could end up just holding a lot more O than I do today. If not, and it expires worthless, well then we move on to our next trade!