Investing in dividend stocks is a popular choice for those looking to diversify their portfolios and earn a steady stream of passive income. However, not all dividend stocks are created equal, and sometimes a particularly high yield can be indicative of a declining share price and weak operational results.
So, let's take a look at one high-yielding stock to see whether it's worth buying for passive income investors.
Understanding the REIT Business
Investors can gain exposure to the real estate asset class by buying REITs, or real estate investment trusts, at a much lower price than buying property outright. Similar to stocks, REITs are traded on an exchange. Generally, REITs own several properties and distribute a majority of their cash flows to shareholders as dividends, making them ideal for income-seeking investors.
One such REIT is Realty Income Corp. (O), which is valued at $39.8 billion by market cap. It pays shareholders an annual dividend of $3.03 per share, indicating a yield of 5.39%.
Part of the S&P 500 Index ($SPX), Realty Income stock has returned more than 131% to shareholders in the last decade, after adjusting for dividends. If we zoom out further, Realty Income stock is up 634% since September 2003, easily outpacing the S&P 500, which has gained 338% in this period.
More recently, of course, O has struggled like many other real estate names, pressured by concerns over the commercial segment of the market. Year-to-date, O is down more than 9%, compared to a gain of 17% for the S&P 500.
Let’s see if you should buy the REIT at its current valuation.
Inside Realty Income's Portfolio
Realty Income owns and operates a portfolio of 13,100 properties across 85 industries. These properties are leased to 1,300 clients in 50 U.S. states, as well as in Puerto Rico, the U.K., Italy, Spain and Ireland.
The cash flows generated from its diversified real estate portfolio allow Realty Income to support a monthly dividend payout of $0.256 per share. These payouts have risen at an annual rate of 4.5% in the last 29 years, showcasing the resiliency of the company’s business model. In fact, Realty Income has now increased dividends for 103 consecutive quarters.
Realty Income has focused on acquiring single-unit commercial properties that are leased out to high-quality clients under long-term net lease agreements. Its triple net lease model offers Realty Income protection against headwinds such as rising costs associated with taxes, maintenance, and other operating expenses.
A majority of these properties are leased to retail and industrial clients that have a service, non-discretionary, and low-price-point component to their businesses.
Realty Income Partners With Blackstone Group
Last month, Realty Income disclosed it's investing $950 million in The Bellagio Las Vegas in partnership with Blackstone Real Estate Income Trust (BREIT). The joint venture will hold a 95% interest in the casino, with the remaining 5% to be held by MGM Resorts International (MGM).
Realty Income will invest $300 million in the JV for a 21.9% equity interest, while BREIT will hold the remaining 73.1%. Realty Income will also invest an additional preferred equity investment worth $650 million, valuing the casino’s real estate at more than $5 billion.
Realty Income emphasized its $650 million preferred equity investment will help it earn an interest rate of 8.1%, while the combined yield on its total investment will be lower, at 7.7%. So, this suggests the deal should help the company increase its annual income by $73 million.
In the last 12 months, Realty Income has invested similarly massive amounts of capital in two other deals. It invested $1.5 billion in a sale-leaseback transaction with EG Group for the latter’s 415 single-tenant retail store properties. Realty Income also invested $1 billion with Plenty to fund vertical farm developments.
What Do Analysts Expect for Realty Income Stock?
Analysts tracking Realty Income stock expect sales to rise by 16.48% to $3.84 billion in 2023, and by 11.02% to $4.27 billion in 2024. Earnings are expected to improve by 2% in fiscal 2023 to $4.00 per share, and by 3.75% to $4.15 in fiscal 2024. So, the stock is priced at about 13x earnings.
Out of the 14 analysts tracking Realty Income stock, six recommend “strong buy,” two recommend “moderate buy,” and six recommend “hold.” The average price target for Realty Income is $67.92, which implies expected upside of more than 22% from its current trading price.
After accounting for dividends, total returns will be closer to 27% in the next 12 months, should this analyst forecast play out as expected.
That said, given the ongoing challenges in the real estate space - especially the commercial side of the business - investors may prefer to look elsewhere for dividend stocks with dependable returns.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
