Realty Income has been doing an absolute bang-up job building value for those who have purchased shares of the company over the years since it has been founded and publicly traded. The company, which is a real estate investment trust, also known as an (REIT) has provided a very awesome 13.9 percent compound annual total return ever since it was listed on the New York Stock Exchange back in 1994.
What’s driving such big returns? The firm’s steadily rising monthly dividend is what has enabled it to provide big payouts to shareholders. Over the years since going public, Realty Income has increased payment a whopping 124 times, the payout growing at 4.3 percent compound annual rate.
Smell that?
That’s what big money smells like.
The REIT’s dividend, at the moment, is yielding around 6 percent. This makes for quite an appealing passive-income stream, wouldn’t you agree? No wonder it’s a screaming buy.
According to Matt DiLallo of The Motley Fool, Realty Income’s dividend is now about to hit a historically high level, which you just know is plastering ear-to-ear grins on the faces of shareholders.
As that chart shows, the payout is near its peak from late last year and during the pandemic-driven sell-off of 2020. It’s much higher than its average range of 4% to 5% over the past decade.
The main factor driving the REIT’s higher yield is its lower valuation. Realty Income expects to produce $4.13 to $4.21 per share of adjusted funds from operations (FFO) this year. That implies 3.3% to 5.3% growth from last year’s level. With its stock price recently around $51 a share, it trades for slightly more than 12 times FFO and an implied real estate capitalization rate of more than 8%.
Those are dirt cheap levels, compared to the broader market and current market-cap rates. The S&P 500 trades at more than 21 times its forward price-to-earnings (P/E) ratio, while the Nasdaq 100 is even more expensive at over 27 times forward earnings. Meanwhile, Realty Income has been buying single-tenant net lease real estate at around a 7% cap rate in recent months.
The main reason behind why Realty Income trades for such a high dividend and lower evaluation is due to higher interest rates. The REIT’s share price has lost somewhere around 30 percent of its value since the peak experienced back in 2022, which is just before the Federal Reserve began raising interest rates.
Why?
Because interest rates and the value of real estate are highly correlated, according to DiLallo.
“As the rates on lower-risk investments like government bonds rise, investors require a higher yield on higher-risk investments like real estate. As a result, real estate values fall, increasing income yields,” he wrote in the article.
DiLallo then noted the headwind would likely begin to fade away over the course of the next few months. He went on to reveal the Federal Reserve has stated that it is fully expecting to begin reducing interest rates this year, potentially delivering three deductions of 0.25 percent to the federal funds rate, with more coming down the pike in 2025 and the year after.
However, DiLallo goes on to write that Realty Income doesn’t need the Federal Reserve to help produce value for those who have invested in the company. In fact, the REIT is expecting to see growth in its adjusted FFO by 4 to 5 percent long term. And that will allow it to continue growing its dividend on a regular basis.
“It anticipates that rents at its existing properties will grow by about 1% per year, driven by contractual rent increases and its ability to secure higher rents when existing leases expire. On top of that, Realty Income has the financial flexibility to continue acquiring income-producing real estate,” the report says.
The company has a massive total addressable market opportunity ($5.4 trillion in the U.S. and $8.5 trillion in Europe), which is growing as it continues expanding into new property verticals. (It added data centers, gaming facilities, and additional European countries over the past year.)
At a minimum, Realty Income will supply investors with a 6% (and growing) annual income yield. Meanwhile, with earnings expected to rise by 4% to 5% annually, it should produce a more than 10% total annualized return, assuming no change to its valuation multiple.
And along with that, the share price also has a substantial upside as the Fed begins to reduce the interest rates. All of these factors come together together to make Realty Income a total screaming buy.