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Motley Fool Issues Rare “All In” Buy Alert
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Investing in the stock market this year has been a roller coaster ride for investors. High inflation and rapidly rising interest rates have weighed on asset prices. The latest inflation numbers are out, showing that the Consumer Price Index (CPI) rose by 8.3% from August last year — higher than economists expected.
There’s no telling where inflation or the economy will go in the coming months. However, history tells us that quality companies that pay out dividends consistently can be an excellent source of income.
One no-brainer dividend stock you can buy today is Realty Income (O 1.39%), the real estate stock that pays investors a monthly dividend. Realty Income has a solid business that can weather economic storms — here’s why the company is so durable.
Image source: Getty Images.
Realty Income is a real estate investment trust (REIT) that acquires and manages properties using long-term lease agreements. It manages over 11,000 properties with clients, including CVS Health, Walgreens, Dollar General, and Dollar Tree.
Realty Income uses a triple-net lease with clients, which makes those clients responsible for taxes, maintenance, and insurance on the properties. This common practice in single-occupancy commercial real estate lowers tenant rents and reduces Realty Income’s financial responsibility for the building. While this leasing model can be risky at the individual building level because of vacancy risk (it’s either 100% or 0% occupied), Realty Income mitigates this risk by spreading it across thousands of properties. That, and a majority of its biggest clients have an investment-grade credit rating.
What makes Realty Income special is its high occupancy levels on its properties for over 25 years now. Going back to 1998, Realty Income has had a median occupancy level of 98% — outpacing other REITs in the S&P 500, whose median occupancy is 94% in that same time.
Image source: Realty Income.
Realty Income occupancy rates have stayed consistent through different economic conditions, including the Great Recession in 2008, which weighed heavily on real estate and other assets. The REIT leverages its 53 years in the business and takes a measured approach to its lease agreements.
For one, the initial lease term is longer than average, with its initial term being over 10 years — helping Realty generate more dependable cash flow over time by using a longer initial lease term. Another attractive feature is that nearly 86% of its leases have built-in rent escalators tied to inflation or fixed increases, which can also make this an attractive inflation hedge.
Two, Realty Income can leverage its vast array of data to analyze new or existing opportunities that look attractive. The company whittles down its investment opportunities by looking at long-term industry trends that show the businesses it leases to are sustainable. It also analyzes the geographies of its properties to ensure they have attractive characteristics, like being near major metropolitan areas.
For example, 85% of the population in the U.S. lives within three miles of the company’s pharmacy clients, CVS Health and Walgreens Boots Alliance. Walgreens plans to build 1,000 doctor’s offices by 2027, presenting an opportunity for Realty Income to grow as its clients grow.
Realty Income concentrates 84% of its portfolio on retail properties. One way it manages this risk is by diversifying across industries. Its highest exposure is to grocery stores, which generate 10.5% of its annualized rent, followed by convenience stores (9.2%) and dollar stores (7.2%).
This diversification and its strict selection process all add up to Realty Income being a dividend stock you can trust. For 27 years, Realty Income has increased its dividend payout to investors, affirming its status as a Dividend Aristocrat. The company has a dividend payout ratio of 76.5% — a conservative ratio that will allow it to maintain its dividend and have enough capital to finance future property acquisitions.
With its 4.4% dividend yield and monthly dividend payouts, investors in search of passive income can’t go wrong with Realty Income stock.
Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and CVS Health Corporation. The Motley Fool has a disclosure policy.
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