Realty Income: Buy, Sell, or Hold?

Realty Income (NYSE: O) , a real estate investment trust (REIT), has been in existence for 55 years. It currently generates rental income from almost 15,500 properties.

REITs date back to 1960 when Congress passed legislation establishing them. These publicly traded stocks provided a way for small investors, particularly those looking for dividend income, to invest in real estate. That's because REITs have to pay out at least 90% of their taxable income as dividends.

However, investors can choose from many different REITs investing in various property types and mortgages. Is Realty Income a buying opportunity or should you sell your shares and buy a better one?

Image source: Getty Images.

Dividend delight

Realty Income has raised dividends annually for more than a quarter of a century. Typically, the board of directors hikes payments multiple times a year.

This includes the recent announcement that it was increasing the monthly rate from $0.263 to $0.2635 starting in October. At the new rate, the shares have a 5.1% dividend yield . That's about 4 times the S&P 500 's 1.3% yield.

Realty Income can easily cover these payments. Its second-quarter adjusted funds from operations (AFFO), a key measure for REITs since it measures cash available for distribution, grew 6% from a year ago to $1.06 a share. This handily covered the $0.777 in dividends.

Management expects AFFO of $4.15 to $4.21 a share this year, up from 2023's $4. That equates to 4% to 5% growth.

Tied to retail

Realty Income receives the bulk of its rent from the retail sector. Management completed its $9.3 billion all-stock acquisition of Spirit Realty earlier this year, which only slightly reduced its dependence. Retailers accounted for 79.4% of annualized rent compared to 82.5% a year ago. The deal should provide other benefits, such as added scale, and management expects it will increase Realty Income's AFFO per share.

Certain tenants, such as Dollar General and Walgreens Boots Alliance , accounting for 3.4% and 3.3% of annual rent respectively (although down from 3.8% for each a year ago), haven't produced stellar results lately. In fact, they've struggled. The exposure to certain retailers and the overall sector may concern some investors given the trend toward online shopping, but the company continues to maintain high occupancy rates and strong lease renewals.

Occupancy at its properties has hovered around 99%, including 98.8% in the second quarter. It also received an almost 6% increase in rents when leases were renewed during the period. That suggests that Realty Income has desirable properties, and it's not having any trouble leasing them.

The decision

I understand the unease at owning a REIT that gets nearly 80% of its rent from the volatile and ever-changing retail sector . However, while its exposure to certain retailers may jump out, it also receives significant shares of rental income from strong companies such as FedEx and Walmart .

Realty Income also tends to tie up tenants in long-term lease agreements . Currently, its leases have an average of nearly 10 years remaining.

For those concerned about the risk, you're receiving a high 5.1% dividend yield without considering future increases. That's higher than the average REIT. The FTSE Nareit All Equity REITs Index had a 3.7% yield at the end of August.

Hence, you're getting 1.4 percentage points higher than the index. Based on recent strong results, that seems like more than adequate compensation. The high dividend yield, high occupancy, and strong renewal trends add up to a buying opportunity.

Should you invest $1,000 in Realty Income right now?

Before you buy stock in Realty Income, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $729,857 !*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx, Realty Income, and Walmart. The Motley Fool has a disclosure policy .