Realty Income Corporation (NYSE:O) witnesses extensive coverage on Seeking Alpha. This company stands out as a top income vehicle, offering a monthly dividend bearing a yield of 5.81% and maintaining a robust dividend record since 1994.
However, despite being a favorite for those seeking dividends, the burning question arises: is it suitable for young investors? Those who have a long runway ahead before relying on passive income. Well, it all boils down to the price paid for Realty Income.
Directing attention to total return on investment, rather than focusing solely on high dividend yields, should be the central concern for young investors with decades left to benefit from a portfolio’s passive income.
The volatile year of 2023 has subjected REITs, including Realty Income, to turbulence. This is due to the FED’s aggressive stance on combating inflation by hiking rates, leading to a downturn in real estate values. Additionally, concerns about refinancing debt at higher rates and dilution of shareholders have impacted market sentiment.
Despite this downturn, the present depressed valuation of Realty Income presents an opportune entry point for younger investors seeking total return. Anticipating valuation normalization while collecting a secure and high dividend for reinvestment holds significant promise.
Quality Business in Diversified Markets
Realty Income operates as a REIT with a focus on single-tenant properties using the triple-net lease model, ensuring stability. The company boasts a well-diversified portfolio and strategic acquisitions, diversifying its tenant base and global footprint.
Ensuring tenant diversification is crucial for stability in any REIT, yet concentrating too heavily on a single geographical area or industry brings additional challenges. Realty Income’s portfolio predominantly comprises 82.6% of what I’d term as defensive retail, alongside 13.1% in Industrial properties and 2.6% in Gaming.
Growth in Dividends & Historical Performance
Realty Income has a robust dividend track record, achieving a 4.3% CAGR from its inaugural dividend payment in 1994 to date. This defines the company as a dividend aristocrat, having consistently raised dividends for over 25 years.
Currently offering a dividend yield of 5.81%, Realty Income indicates the potential for increased returns. With a 3.0% CAGR projection on its dividend yield for the next decade, the yield on cost in 10 years may potentially reach 7.6%.
Discount to Historical Valuation Presents Total Return Opportunity
Realty Income’s current discount presents an enticing total return opportunity for investors with long-term financial goals. Its valuation suggests substantial potential for both income-focused and long-term horizon investors, outperforming the market in the coming years.
Given its currently depressed valuation, Realty Income offers a substantial margin of safety, projecting to surpass the market’s total return over the next four years.
Realty Income ticks all the essential boxes for investors, regardless of age. Its consistently growing dividend and current depressed valuation make it an attractive investment opportunity for those with long-term investment horizons.
At its current valuation, Realty Income has the potential to yield a satisfactory annual capital appreciation and offers an attractive investment opportunity for individuals with long investment horizons.
While I currently hold a stake in Realty Income, its current valuation might lead me to consider other investments in the future. However, for now, I am taking advantage of its monthly dividend distribution.