shares of real estate income (New York Stock Exchange: O) It has fallen about 33% from its pre-pandemic high in early 2020. But nothing major has changed in terms of business, at least not a permanent negative one. If you're looking to find a reliable dividend stock, there's still time to grab Realty Income and its historically attractive 5.7% yield. Here's why you should do it now without risking being late to the party.
Real estate income is an industry leader
Realty Income is a real estate investment trust (REIT) that purchases single-tenant properties where most of the property-level costs are borne by the tenant. This is called a net lease. A single property is riskier because there is only one tenant, but when diversified across a large portfolio, it is less risky given that most of the normal property operating costs are borne by the tenant. will be quite low. Realty Income owns a huge 15,450 properties.
Realty Income is arguably the largest publicly traded net lease REIT. In fact, the company's market capitalization is $46 billion, nearly four times that of its next closest competitor. Realty Income has also proven to be a very reliable dividend stock, increasing its dividend every year for 29 consecutive years. The adjusted funds from operations (FFO) dividend ratio for 2023 was very reasonable at around 75%. While this may seem high, keep in mind that property income eliminates the need to pay most property-level expenses and frees up more cash to pay dividends.
Meanwhile, the aforementioned decline in stock prices has pushed yields towards their highest levels in the past decade. Therefore, the stock also looks relatively cheap at the moment.
What's wrong with real estate income and what will the future hold?
But why is real estate income so cheap? The easy answer is interest rates, but the really important thing for investors to understand is that nothing has changed about the company. It remains a large, conservatively managed net lease REIT. The problem is actually broader, as rising interest rates simply make it more expensive for REITs to operate. Debt plays an important role in property acquisition, and real estate markets take time to adjust to changes in the interest rate environment.
However, over time, if the seller wants to dispose of the property, he will have to adjust the asking price lower and improve the profit for the buyer. When that happens, REITs will see better overall financial performance. Prices simply tend to stick because sellers don't want to lower prices unless they actually have to. Sellers may experience some pain, such as if they are facing debt maturities.
That said, Realty Income's size gives it important advantages over its smaller peers. First, because the company is so large, it tends to have easier access to capital markets. Second, it has an investment grade credit rating because it is conservative. Combining the two typically allows REITs to obtain relatively cheap financing for acquisitions in any market environment. The company also has enough scale, including its position as an industry consolidator, to take on deals that peers couldn't manage (it recently acquired a smaller rival). The company's portfolio also includes European assets, allowing it to invest in two broad regions, significantly increasing its opportunities.
Real Estate Income: For those who want to own the biggest and best thing.
To be fair, real estate income is likely to face difficult market conditions until interest rates stabilize or, hopefully, come down. So you haven't missed out here and you probably have plenty of time to dig deeper without risking missing out on opportunities here. But if you dawdle too much, trying to time the perhaps perfect tipping point, you risk missing out on the opportunity to buy this reliable, if boring, industry-leading net lease REIT. Perhaps it is better to think the right thing and act sooner rather than later.
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Reuben Gregg Brewer holds a position in the Real Estate Revenue department. The Motley Fool has a position in and recommends Realty Income. The Motley Fool has a disclosure policy.
Is it too late to buy real estate income stocks? Originally published by The Motley Fool
