Realty Income: Buy, Sell, or Hold? | The Motley Fool (2024)

There are a lot of choices for income investors these days. Even if you narrow your search to high-yielding options, there are more than 1,300 U.S.-exchanged listed investments currently yielding more than 5%.

One of the more popular names on that list is Realty Income (O -0.43%). The real estate investment trust (REIT) is a titan among commercial real estate plays, known largely for its monthly distributions and long track record of increases. Is now a good time to buy Realty Income? Is the smarter move at this point to sell or hold the REIT? Let's take a closer look.

Buy Realty Income

There is more to Realty Income than the gimmickry of dividing quarterly distributions into three monthly payouts. Realty Income is a rock-steady star in the realm of income investing. It's one of just three REITs that have come through with at least 25 years of increased distributions. Realty Income stretched that streak of annual increases to 29 earlier this year.

Realty Income watches over a massive empire. It owns 15,450 commercial properties covering 89 different industries. The diversification speaks to the safety of Realty Income, at least relative to most REITs with more concentrated portfolios.

There are some other traits that speak to the conservative nature of the investment. Clients enter into long-term triple net leases to be handed the keyes to Realty Income's properties. Beyond the rent terms, the tenant is assuming the burden of real estate taxes, property insurance, and its operating expenses. This makes the arrangements far more predictable on Realty Income's side of the ledger.

Even Realty Income's portfolio has a risk-averse bent. Its two largest industry concentrations are supermarkets and convenience stores, a pair of segments that have been historically resilient in good times and bad.

Finally, we can dive into the dividend itself. The current 5.9% yield is higher than money market funds and most safe fixed-income options. It's also fair to say that the distributions will keep moving higher. Realty Income has come through with 126 increases since listing on the New York Stock Exchange 30 years ago. The boosts are typically fractional slivers of a penny, but they add up. The compound annual growth rate of its dividend since its listing in 1994 is 4.3%.

Sell Realty Income

There's a lot to like about Realty Income's risk-averse approach to assembling a business that provides passive commercial real estate revenue. But that doesn't mean that there aren't some pressure points.

Let's start with some of its largest clients. Red Lobster is one of its 20 largest accounts representing 1.1% of its annualized contractual rent. It filed for bankruptcy reorganization earlier this year. It also has a similarly sized position in the country's largest multiplex operator, AMC Entertainment, which could become a potentially problematic client if folks stop going to the movies in this digital age. Realty Income also has larger exposure to fitness centers and casinos, so it's not all dollar stores and warehouse clubs in the portfolio.

This is also a REIT that specializes in commercial real estate. It's at the mercy of the economy to keep its consumer-facing clients flush with business to keep paying the rent. There's also some international risk here, as nearly 15% of its properties are located in Europe.

Hold Realty Income

The positives outweigh the negatives when it comes to Realty Income. It stands tall in the wide world of REITs with its conservative portfolio composition on nearly 30 years of increases. The risks are real, but the rewards are potentially even more attractive at this point.

Holding Realty Income at this point isn't an unreasonable strategy, but the current opportunity favors the buyers. The REIT is trading 8% lower this year and down 12% over the past 12 months. The depressed shares against the increases that have happened over the past year have left it approaching a 6% yield. It's a payout that looks good now, but it will look even better when interest rates inevitably start moving lower for fixed-income investments. As a bull and an owner of Realty Income, I see this as a good time to establish, or add to, an existing position in the time-tested REIT.