Like bargains? It would be surprising if you didn’t. After all, why pay more for something when you can own it for less?
The same mindset applies even when it comes to investing. Assuming it’s a stock you want to own, in most cases if you’re patient enough and willing to buy it after (or maybe even during) a dip, you’re better off in the long run.
With that as the backdrop, growth-minded investors may want to jump on Realty Income Corporation (O 1.67%) while it’s down 38% from its mid-2022 high. This weakness isn’t apt to persist, and this ticker has a knack for bouncing back sharply as well as unexpectedly. A generous dividend will help dampen any further bearish volatility that’s yet to work its way out.
REITs are only down for temporary reasons
OK, it’s not a growth stock. It’s not a stock at all, in fact. Realty Income is instead a real estate investment trust, or REIT. It’s got just as much potential upside from here, however, as many other more conventional growth stocks do. That’s why it’s worth a closer look from growth-seeking investors.
But, first things first … what’s a REIT exactly, and why are shares of this one down so much?
When you own a REIT you effectively own a piece of a rental real estate portfolio; the dividends that REITs pay are your share of the rent payments that REIT managers collect on your behalf. It’s certainly a more affordable and more liquid means of owning rental properties than purchasing an entire building!
These regular rent payments and a REIT’s liquidity do come at a price of sorts. That is, since REITs trade just like stocks you can buy and sell whenever you like, their price can and does change. That’s how Realty Income shares are down 38% in just a little over a year, mirroring the performance of other real estate investment trusts.
There’s a clear — and temporary — reason Realty Income shares have been beaten down so much though. That’s rising interest rates. Higher interest rates pull dividend yields higher with them. Since REITs’ key features are the dividend payments they offer, rising interest rates have driven Realty Income shares down as a means of pumping its dividend yield up.
It’s also possible the market’s just been worried that high interest rates could eventually spur economic weakness, in turn crimping demand for Realty Income’s consumer-dependent, retail-related rental properties. Dollar General, Walgreens Boots Alliance, Dollar Tree, and 7-Eleven are some of its top tenants.
The thing is, both of these factors are starting to fade. The Federal Reserve foresees a near-term end to the recent wave of interest rate increases and is even calling for lower interest rates beginning next year. Meanwhile, it’s increasingly looking like the U.S. and global economies will be able to sidestep a full-blown recession and make a so-called “soft landing” instead.
And Realty Income’s resiliency is shining through in the meantime even if the stock’s recent price action doesn’t reflect it.
Realty Income, up close and personal
So what makes Realty Income such a hot buy at its mutimonth low?
The prospect of an easing back to solid economic growth rates is a factor to be sure. But there’s more: Realty Income clearly benefits from an economic rebound, but it would be starting it already in a position of strength. It ended the second quarter of this year with 99% of its properties already occupied, with the vast majority of its leases not expiring until 2027 or later.
Let’s connect the dots. Its cash flow is already strong. It will only get stronger if and when the economy does.
Perhaps the best bullish argument to be made for Realty Income, though, is its track record of effective management of its existing properties and savvy acquisitions of new ones. From the purchase of a Taco Bell restaurant back in 1969 to more than 13,100 properties now, the company continues to generate enough cash to more than cover its monthly — yes, monthly — dividend that’s been paid every month for the past 639 months and raised every quarter for the past 104 quarters. The company is now even utilizing artificial intelligence to determine which properties are worth buying and which ones aren’t.
The recently announced plans to acquire Spirit Realty Capital is the latest of such deals that will make Realty Income bigger and better.
Spirit brings much to the table, but perhaps most importantly, it will further diversify the REIT’s business by reducing Realty Income’s overall exposure to nine of the top-ten industries it serves. Although Realty Income’s shares fell following news of the all-stock purchase, it’s apt to be one of the many deals that ends up more than paying for itself in the end. Indeed, with the selling dragging the stock to a multimonth low that drives Realty Income’s dividend yield up to 6.3%, it’s possible shares are at a major turning point for the better. We’ve certainly seen this REIT snap back from such routs before with little-to-no warning.
Analysts’ consensus price target for Realty Income currently stands at $60. That’s roughly 30% above the stock’s present price.
Don’t overthink it
Or maybe Realty Income isn’t at (or even near) a major bottom. We don’t know for sure. The thing is, it doesn’t entirely matter.
Although Ben Franklin often gets credit for coining the phrase, it was actually Robert Burton who first pointed out the potential pitfalls of being “penny wise and pound foolish” in his book The Anatomy of Melancholy published in 1621. For investors, it just means holding out to step in at the exact bottom can cost you a sizable sum of money simply because you never truly know when and where a bottom is being made.
What we do know today is that Realty Income shares are down quite a bit for reasons that no longer make much sense. We also know that a yield based on a very reliable dividend is quite high as a result.
Don’t overthink this one. If you’re looking for above-average odds of capital appreciation and dividend income you could certainly do a lot worse than Realty Income even if it’s not your typical growth stock.