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Few passive income generators boast as storied of a history as Realty Income stock (NYSE:O). It has a legendary multi-decade outperformance since going public.
And it has a remarkably consistent 26-year and 101 consecutive quarter dividend growth streaks.
O is arguably the best monthly paying dividend growth stock in the stock market today. Lately the stock price has sold off substantially, bringing it to valuation levels that are well below its historical averages and only come around rarely. As a result, we think it is a very opportune time for retirees to buy the stock hand-over-fist and in this article we share three reasons why:
#1. The Dividend Is One Of The Safest Among 5%+ Yielding Stocks
With a dividend yield of 5.5% that exceeds the current 10-year treasury yield by over 30%, O qualifies as a high-yielding stock. Despite this high yield, however, its dividend is one of the safest in the market today, especially among common stocks that yield over 5%. This safety stems from several factors:
- Its aforementioned impressive dividend growth streak makes it a member of the Dividend Aristocrats, implying that management has a strong commitment to not only supporting, but growing, the dividend moving forward.
- Its track record of growing earnings per share in 26 out of 27 years and achieving a median annual AFFO per share growth rate of 5% since 1996 shows just how stable its business model is through all sorts of economic environments and technological disruptions.
- Its immense scale (~$60 billion enterprise value with ~$3.4 billion in annualized base rent) and vast diversification (12,237 commercial real estate properties from 1,240 clients across 84 industries and all 50 states plus Puerto Rico, Italy, Spain, and the U.K.) along with its conservatively structured triple net lease business model give it a very stable cash flow profile.
- Its defensive positioning is further bolstered by the fact that ~41% of its rent comes from investment grade clients and ~92% of its total rent is resilient to economic downturns and/or insulated against e-commerce headwinds.
- As a result, its 98.2% historical median and lowest year-end portfolio occupancy rate of 96.6% further accentuate the stability of its business model and resilience in the face of broad lock-downs of the economy and/or severe recessions.
- Its A- credit rating, well-laddered debt maturities, significant liquidity, and attractive and stable cost of debt mean that it has plenty of financial flexibility to continue supporting its dividend while reinvesting in growth as well, regardless of the interest rate and economic environment.
- Its expected 2023 AFFO payout ratio of 76.4% gives it plenty of financial cushion, so even if the company were to suffer a rare meaningful hit to AFFO, the dividend would likely remain covered by AFFO.
As should be evident from this list, O’s dividend – despite being quite substantial – enjoys several layers of safety, making it an ideal source of monthly income for retirees.
#2. The Dividend Yield Plus Growth Profile Is Very Attractive
In addition to the safety of its dividend, its current yield plus long-term growth profile is also very attractive. Analysts currently project that O will grow its AFFO per share and dividend per share at a 4-5% CAGR through at least 2027. When combined with its current ~5.5% NTM dividend yield, O offers investors a ~10% valuation multiple neutral path to 10% annualized total returns. Given that this total return is 55% tilted towards current yield and the risk profile is so low, this is an exceptionally attractive risk-reward profile for investors, especially retirees.
Even better, it means that O will provide a passive income stream to retirees that substantially exceeds the 4% Rule that so many abide by while also providing an expected annualized growth rate of that passive income stream that is roughly twice the long-term average rate of inflation. When you combine a more than sufficient current yield with low risk and a high likelihood of growing at a pace faster than inflation over the long-term, you get a truly ideal passive income stream for a retiree.
#3. The Valuation Is Extremely Attractive
Last, but not least, O’s valuation is extremely attractive right now. The consensus analyst estimate of NAV per share reveals that the current stock price is trading at a ~4% discount to the private market value of the assets. What this means is that investors who buy at current prices are buying the underlying real estate for a slight discount to what they could buy it for directly. On top of that, investors get the world-class management, battle-tested business model, and sector-leading cost of capital (not to mention the benefit of instant liquidity and divisibility) for free.
The degree of this bargain is reflected in the fact that O has historically traded at a P/NAV of over 1.2x. The discount is made even more clear by the fact that O’s NAV per share has been revised down to account for rising interest rates/cap rates. As a result, if/when interest rates decline again, its NAV will likely shoot higher, driving even greater potential upside than the current discount to NAV implies.
Investor Takeaway
O has it all: a tremendous track record, stellar management, enough scale and diversification to make it like a REIT ETF of its own, a very conservatively positioned business model, a fortress balance sheet, and – thanks to the recent sell-off in the stock price – a very attractive valuation.
As a result, it looks like a very compelling buy for retirees, and we rate it to be a long-term low risk Strong Buy.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)
