Realty Income (NYSE: O) has done a magnificent job creating value for its shareholders over the years. The real estate investment trust (REIT) has delivered a 13.9% compound annual total return since its listing on the New York Stock Exchange in 1994.
A big factor driving those returns is the company’s steadily rising monthly dividend. Realty Income has increased that payment 124 times since going public, growing the payout at a 4.3% compound annual rate.
The REIT’s dividend currently yields around 6%. That attractive passive-income stream is one of the many factors that make it a screaming buy right now.
A compelling entry point
Realty Income’s dividend is approaching a historically high level:
O Dividend Yield Chart
O Dividend Yield data by YCharts.
As that chart shows, the payout is near its peak from late last year and during the pandemic-driven sell-off of 2020. It’s much higher than its average range of 4% to 5% over the past decade.
The main factor driving the REIT’s higher yield is its lower valuation. Realty Income expects to produce $4.13 to $4.21 per share of adjusted funds from operations (FFO) this year. That implies 3.3% to 5.3% growth from last year’s level. With its stock price recently around $51 a share, it trades for slightly more than 12 times FFO and an implied real estate capitalization rate of more than 8%.
Those are dirt cheap levels, compared to the broader market and current market-cap rates. The S&P 500 trades at more than 21 times its forward price-to-earnings (P/E) ratio, while the Nasdaq 100 is even more expensive at over 27 times forward earnings. Meanwhile, Realty Income has been buying single-tenant net lease real estate at around a 7% cap rate in recent months.
A potential needle-moving catalyst on the horizon
Higher interest rates are the main reason Realty Income trades for a higher dividend yield and lower valuation. The REIT’s share price has lost about 30% of its value from the peak in early 2022, right before the Federal Reserve started raising interest rates. That’s because real estate values are highly correlated to interest…
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