A Reliable Dividend Stock for Long-Term Investors
Realty Income, one of the world’s largest real estate investment trusts (REITs), has been a consistent dividend payer for long-term investors. With a forward yield of 6%, significantly higher than the 10-year Treasury’s current yield of 4.8%, it’s an attractive option for income-oriented investors. But can it generate substantial gains over the next decade?
A Retail REIT with a Proven Track Record
Realty Income’s business model is straightforward: it purchases commercial properties, rents them out, and distributes a significant portion of the rental income to investors as dividends. As a REIT, it must distribute at least 90% of its pre-tax profits to maintain a favorable tax rate. With a diverse portfolio of 15,457 properties across the US, UK, and Europe, Realty Income has consistently delivered strong returns.
Recession-Resistant Tenants
Realty Income’s top tenants, including Dollar General, Walgreens, and 7-Eleven, are recession-resistant retailers that provide a stable source of income. While some tenants have struggled with sluggish sales and store closures, Realty Income has offset this pressure by providing more leases to its stronger retailers. Its occupancy rate has never dipped below 96% since its public debut, ending the first nine months of 2024 with a healthy occupancy rate of 98.7%.
Consistent Profit Growth
Realty Income’s adjusted funds from operations (AFFO) per share have grown at a compound annual growth rate (CAGR) of 5% from 2013 to 2023, despite market volatility. It expects its AFFO to grow 4% to 5% to $4.17 to $4.21 per share for 2024, easily covering its forward annual dividend rate of $3.17 per share.
Historical Performance
Over the past 20 years, Realty Income’s stock has rallied 173%, generating a total return of 732% after including reinvested dividends. This would have turned a $10,000 investment into about $83,200. While this may not seem impressive, it outperformed the S&P 500’s total return of about 680% during the same period.
Valuation and Growth Potential
At $53, Realty Income’s stock appears undervalued at 13 times its estimated AFFO for 2024. As interest rates decline, its valuation could increase. Assuming a 5% CAGR in AFFO from 2024 to 2034 and a more optimistic valuation of 20 times its AFFO by the final year, its stock could potentially rally about 157% to $136 over the next 10 years.
A Solid Long-Term Investment, but Not a Millionaire-Maker
While Realty Income is a reliable dividend stock with a proven track record, it’s unlikely to generate substantial gains over the next decade. However, it remains a solid long-term investment for income-oriented investors seeking consistent returns.
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