Looking for ideas as stocks sell? Try this dividend aristocrat
Many investors love dividends, and for good reason. Enough money invested in high yielding dividend stocks could provide significant income, which is why dividend stocks are so popular with retirees. And some of the best dividend-paying stocks are REITs (Real Estate Investment Trusts), as companies structured in this way are required to pay out 90% of their income as dividends.
Monday’s pullback may make you wonder which stocks will hold up best if the market continues to fall. Real estate income (NYSE: O) is a REIT that pays a high yielding monthly dividend, and that’s a great place to start.
A stable source of income
Realty Income owns over 6,700 properties and rents them out to retailers. It uses a triple net lease model, which means its tenants pay most of the operating expenses, such as property taxes and building insurance.
In an uncertain era of retailing, Realty Income is focused on businesses that cannot easily be replaced by e-commerce. Its main tenant, representing 6% of annualized contractual rental income, is the convenience store chain 7-Eleven, and other main holdings include Walgreens, General dollar, and Walmart – all businesses that were considered essential and remained open during pandemic closures.
Renting to stable businesses with relatively cohesive operations means Realty Income doesn’t have to worry about not getting the rent. This became even more important when stores were closed last year and other REITs saw their revenues plummet. In the second quarter of 2020, amid the worst pandemic restrictions, Realty Income collected 87% of its rent, and that rose to 93% in the third quarter. It stood at 99% in the second quarter of this year. Realty Income says 96% of its portfolio is in the resilient category, and most of those stores remained open during the restrictions, making more sales than ever. This placed Realty Income in an exclusive category of REITs that continued to perform well during the worst of the pandemic.
Within this portfolio of strong companies, Realty Income is also well diversified across industries to spread any risk and ensure more predictable cash flow. It has 630 unique clients operating in 58 sectors with a portfolio occupancy rate of 97.9% for 2020, a slight decrease from 98.6% in 2019, but excellent given the operational environment of the last year. Sales grew 10% in 2020 year-over-year, and adjusted operating funds (AFFO, a metric use of REITs similar to net income) increased $ 0.07, or 2%. In the second quarter of this year, sales grew 12% year-on-year and AFFOs grew a further 2%.
Where does the stock go?
Realty Income is one of the top 10 REITs in the world, and it seeks to be in the top five. The company searches for potential properties, then selects the best, and a high supply volume – $ 64 billion in 2020 and $ 40 billion in 2021 – translates into a higher selectivity rate. He has already acquired $ 2.2 billion in properties so far in 2021, and as he grows his portfolio, the income grows, which is fueling the dividend.
Last year, the company announced a merger agreement with TRUTH, which would bring the total number of properties to over 10,000. The deal is expected to be finalized in the fourth quarter. Many of the main tenants of VEREIT are like Realty Income, companies with a strong physical presence such as Walgreens and FedEx. Interestingly, its main tenant is the Red Lobster restaurant chain, which is more at risk than the typical Realty Income tenant.
Dividends and more
Realty Income stock is returning nearly 4.2% at Monday afternoon prices. He recently became a dividend aristocrat, which means he has increased his dividend every year for at least 25 years. Realty Income is one of only three REITs to have this designation, and it involves a stable and reliable dividend.
Don’t expect strong growth in the share price of Realty Income; without dividends, the share price has been stable for five years. The advantage of this stock is its dividend, and it’s a natural fit, anytime, for anyone looking for a great dividend-paying stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.