Over the last couple of years, investors have been able to generate incredible profits from high growth opportunities such as artificial intelligence (AI) or the weight loss medications taking over the pharmaceutical sector. However, investing in growth stocks is a doubled-edged sword because they can fall precipitously during volatile economic periods.
On the other hand, one stock that has been a consistent winner for long-run investors is Realty Income (NYSE: O) . Although the blue chip real estate investment trust (REIT) may not be as alluring as a breakthrough opportunity in technology or healthcare, I see two reasons for investors to buy this stock hand over fist right now.
Let's dig into why Realty Income stock could be headed for liftoff, and why now looks like a lucrative opportunity to scoop up shares.
1. Rate cuts could supercharge Realty Income
On the surface, it may seem that Realty Income's business as a retail-focused REIT has been jeopardized over the last couple of years due to a challenging macroeconomic picture. However, many of the company's largest customers are cost-conscious retailers such as Dollar General , Walgreens , Dollar Tree , and Walmart . This makes Realty Income more insulated to fluctuations in consumer shopping habits.
What is a more prominent risk item for retail REITs is that they are sensitive to interest rates . Considering the Federal Reserve has raised interest rates 11 times since 2022, it's not entirely surprising why some investors may be skittish over an investment such as Realty Income.
I think these concerns can be put to rest, though. Last week, Fed Chairman Jerome Powell gave a noteworthy speech at the Jackson Hole Economic Symposium, during which he strongly suggested that changes to monetary policy are on the horizon.
Reducing interest rates can benefit Realty Income as it'll make the company's cost to borrow less expensive . In turn, Realty Income should have more financial flexibility to fund its growth -- namely, bolstering its real estate portfolio.
Image source: Getty Images.
2. The dividend is reliable, regardless of the economic picture
Perhaps the biggest reason to invest in Realty Income is due to the company's dividend . Realty Income pays a monthly dividend , which is really enticing for passive income investors.
While the macroeconomic picture has been a little cloudy over the last couple of years, some of the themes explored will help illustrate that Realty Income has been a consistent source of gains throughout many different economic periods.
Over the last 20 years, Realty Income stock has generated a total return of 732% -- outperforming the S&P 500 . Of course, over the last two decades the U.S. economy has endured tumultuous events such as the Great Recession between 2008 and 2009, as well as the COVID-19 pandemic.
O Total Return Level data by YCharts
This graphic is a clear example as to why Realty Income has been able to consistently outperform the broader market . Since 2000, Realty Income's occupancy rates have hovered around 98%. Furthermore, the company's occupancy rates barely even budged during more volatile economic periods such as the financial crisis between 2008 and 2009, as well as during peak COVID periods in 2020 and 2021. These dynamics demonstrate the reliability and resiliency of Realty Income's pocket within the broader retail sector.
Data source: Realty Income investor relations.
So is Realty Income a buy?
Since the Fed starting raising rates back in March 2022, Realty Income stock has returned an uninspiring 5% -- dramatically underperforming the broader market.
To me, it's clear that rising borrowing costs has taken a toll on the perception of Realty Income's investment prospects, but not necessarily the actual business. The company's funds from operations ( FFO ) have steadily increased despite high interest rates.
In turn, Realty Income has not only continued to fund its monthly dividend, but also raise it. In mid-August, Realty Income raised its dividend yet again -- marking a milestone of 650 consecutive months and 107 consecutive quarters since going public in 1994.
I see Realty Income as a reliable source of dividend income no matter what the economic climate is. With rate cuts looming and the potential that poses for newfound growth, now looks like a great time to take advantage of Realty Income's 5% dividend yield and scoop up some shares.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0