As crazy as the market gets, here’s a stock I’ll never sell
Real estate income (O 0.59%) is a leading name in real estate investment trusts (REITs). It has always enjoyed a premium price compared to its closest peers. This premium has been earned multiple times at this point, which is why I intend to keep this name in my portfolio during bull and bear markets. Here’s a closer look at why.
A solid foundation
Realty Income’s core business is the net rental structure. This means that it owns single-tenant properties and its tenants are responsible for most of the operating costs of the assets they occupy. While any individual property is high risk, given that there is only one tenant, in a large portfolio, the net rental approach is very low risk. Realty Income’s portfolio is huge, with over 11,000 properties. On top of that, the REIT has an investment-rated balance sheet, so it’s also tax-conservative.
The proof is in the dividend, however, with Realty Income on the Dividend Aristocrat list. In total, it has increased its dividend for 27+ years. During this streak, meanwhile, this monthly-paying REIT has a series of 98 quarterly increases. To be fair, the increases tend to be modest in the lower to mid-range numbers, but even small increases add up over time.
Notably, these dividend increases have continued through multiple recessions and market corrections. Since I’m focused on generating a reliable stream of passive income, Realty Income is a perfect fit for me.
My mistaken view of evaluation
The thing is, I didn’t always think of Realty Income the way I do today. I owned it years ago and then sold it when the stock price went up and the dividend yield went from around 10% to something in the 4% range , which is the case today (around 4.3%). I sold because I was anchored to the 10% yield at which I bought Realty Income. But this strong performance occurred during a market downturn.
The difference I see today is that access to capital is fundamental to the REIT model. REITs pay large dividends to avoid corporate-level taxation. But pushing back 90% of their taxable income, the level required to remain a REIT, leaves them with little cash for growth investments. This means they must access the capital markets by selling bonds and stocks.
Having a high quality balance sheet allows Realty Income to access inexpensive debt. Having a low yield and therefore a premium share price – since yield and price move in opposite directions – gives the REIT access to cheap equity. Together, this means Realty Income can profitably invest in new properties in just about any market environment. Plus, given its size, it can handle big deals that most of its peers simply couldn’t handle, like its acquisition of peer VEREIT or the recent $1.7 billion purchase of a casino. in Massachusetts.
A sale could be a buying opportunity
When I step back from Realty Income today and think about owning it for the growth it can achieve over time, I’m not sure I ever want to sell it. It simply has too many advantages over its peers, including trading at a high price. In fact, if stocks were to sell with the broader market, it would more likely lead me to buy more stocks than to sell this reliable dividend producer. For most dividend investors, Realty Income is likely to be a solid dividend-focused investment that will help you weather the inevitable ups and downs of the market.