Is Realty Income (O) the Dividend Stock You Should Buy Now?
Over the past 30 years, Realty Income has generated a total return of 4,960% with reinvested dividends, significantly outperforming the S&P 500’s total return of 2,030%. As we approach 2025, investors may wonder whether it’s time to buy, sell, or hold this leading REIT stock.
Key Facts and Figures
Realty Income operates by purchasing commercial properties, leasing them out, and distributing a substantial portion of the rental income as dividends to its investors. To maintain favorable tax rates, U.S. REITs must distribute at least 90% of their taxable income as dividends.
When analyzing a REIT like Realty Income, it’s crucial to review metrics such as total assets, occupancy rates, and Adjusted Funds From Operations (AFFO) per share, which provides a more accurate estimate of a REIT’s profitability compared to Earnings Per Share (EPS). For Realty Income, all three metrics are showing consistent growth:
| Metric | 2021 | 2022 | 2023 | 2024 (est.) |
|---|---|---|---|---|
| Total Assets ($ billions) | 11.136 | 12.237 | 13.458 | 15.450 |
| Occupancy Rate | 98.5% | 99% | 98.6% | 98.8% |
| AFFO per Share | $3.59 | $3.92 | $4.00 | $2.09 |
In January 2024, Realty Income completed an all-stock merger with its smaller rival, Spirit Realty Capital, adding 2,037 properties to its portfolio.
Reasons to Be Cautious About Realty Income
While Realty Income’s business model appears robust, some bears express concerns due to high interest rates and the struggles of some of its major tenants. The Federal Reserve cut its benchmark interest rate in September for the first time in four years, but if inflation continues to rise, this could slow future cuts.
High interest rates pose two primary risks for REITs like Realty Income. First, elevated rates make acquiring new properties more expensive. Second, higher rates make risk-free options such as CDs and T-bills more attractive compared to dividend stocks.
Moreover, Realty Income’s two largest tenants—Walgreens and Dollar Tree—are facing challenges. Walgreens, which accounted for 3.3% of Realty Income’s annual rent as of Q2 2024, plans to close 1,200 stores over the next three years. Similarly, Dollar Tree, contributing 3.1% of annual rent, intends to shut down about 1,000 stores. Other smaller tenants, including CVS, AMC, and Red Lobster, are also closing many brick-and-mortar locations.
Reasons to Consider Buying Realty Income
Bullish investors believe these concerns may be overstated. Realty Income’s attractive dividend yield and seemingly discounted stock price present opportunities for long-term investors. With a forward yield of 5.4%, Realty Income’s yield is notably higher than the 4.4% yield on 10-year Treasuries. Additionally, if the Fed continues to cut rates in the coming year, Realty Income and other REITs may become more appealing compared to CDs, T-bills, and other fixed-income investments.
As for its weaker tenants, many of these leases will expire in the coming years, providing Realty Income ample time to secure new tenants. Stronger tenants, like Dollar General and Walmart, are likely to alleviate some of the pressure by opening new stores.
Realty Income services over 1,500 tenants across 90 different industries, and its occupancy rate has never dipped below 96% since its IPO. This scale and diversification should help mitigate short-term concerns and generate stable long-term returns.
In the last year, Realty Income’s stock has already risen over 20% in anticipation of potential rate cuts. However, at around $60, it appears to be 15 times cheaper than last year’s AFFO per share, suggesting limited downside risk due to its attractive valuation and high yield, making it a safe investment for income-focused investors.
Should You Buy, Sell, or Hold Realty Income Stock Now?
While Realty Income may not be an exciting growth stock, purchasing and holding it now seems far more advantageous than selling. Investors should certainly monitor interest rates and the health of its major tenants, but Realty Income’s clear strengths may outweigh these minor weaknesses.
As Realty Income continues to navigate market fluctuations, its strong foundation and commitment to dividend payouts could provide a stable income stream for investors in the long run.
