Is It Too Late to Buy Realty Income Stock? | The Motley Fool (2024)

Shares of Realty Income (O 0.48%) trade down around 33% from their pre-pandemic highs in early 2020. But nothing material has changed about the business, or at least not in a permanently negative way. If you are trying to find a reliable dividend stock, there is still time to grab Realty Income and its historically attractive 5.7% yield. Here's why you should do that now and not risk being late to the party.

Realty Income is the industry leader

Realty Income is a real estate investment trust (REIT) that buys single-tenant properties for which the tenants are responsible for most property-level expenses. This is what is known as a net lease. Any single property is high risk, given there's only one tenant, but spread over a large portfolio the risk is fairly low, given that normal property operating expenses are largely pushed onto the tenant. Realty Income owns a massive 15,450 properties.

Realty Income is easily the largest publicly traded net lease REIT. In fact, its $46 billion market cap is roughly four times larger than its next closest peer. And Realty Income has proven to be a very reliable dividend stock, having increased its dividend annually for 29 consecutive years. The adjusted funds from operations (FFO) payout ratio in 2023 was a very reasonable 75% or so. While that may seem high, remember that Realty Income doesn't have to pay most property-level expenses, which frees up more cash to pay dividends.

Meanwhile, the stock price decline noted above has pushed the yield up toward its highest levels of the past decade. So the stock also looks relatively cheap right now, as well.

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What's wrong with Realty Income and what about the future?

But why is Realty Income cheap? The quick answer is interest rates, but the really important thing for investors to understand is that nothing has changed at the company. It is still a large and conservatively run net lease REIT. The issue is really more broad-based, as higher interest rates simply make it more expensive for REITs to run their businesses. Debt plays an important role in property acquisitions and property markets take time to adjust to the changed interest rate environment.

However, over time, sellers will have to adjust their asking prices lower, improving returns for buyers, if they want to dispose of their properties. When that happens, REITs will, on the whole, see their financial performance improve. Prices simply tend to be sticky because sellers don't want to reduce prices unless they actually have to, which sometimes requires a little pain (such as the seller facing a maturing debt obligation).

That said, Realty Income's size provides important advantages over smaller peers. First, it is so big that it tends to have easier access to capital markets. Second, it is conservative so it has an investment-grade credit rating. Combine the two, and the REIT can usually get relatively cheap capital to fund its acquisitions in any market environment. It is also large enough to take on deals that its peers couldn't manage, including being an industry consolidator (it recently bought a smaller rival). And the company's portfolio includes European assets, so it can invest in two broad regions, which increases its opportunity set materially.

Realty Income: For those who like owning the biggest and best

To be fair, Realty Income is likely to face difficult market conditions until interest rates stabilize or, better yet, head lower. So you haven't missed out here and you probably have some time to do a deep dive without the risk of missing the opportunity here. But if you dawdle too long, perhaps trying to time the perfect turnaround point, you could risk missing a chance to buy this reliable, though boring, industry-leading net lease REIT. It's probably better to be about right and act sooner rather than later.