Latest Post

Kamala Harris coconut meme explained in context Flood warning from the National Weather Service
With this dividend stock with a 6% yield, you can build your wealth brick by brick

Due to the falling price, investors are averse to the stock. This is not without irony.

Investors who are looking for a specific return on investment should love dividends because they are tangible income that you can’t lose once it’s paid out. For example, let’s say you want to earn 10% on a stock you own for a year. If that stock pays a 5% dividend, you’re already halfway to your goal!

You can rest easy knowing that your investment is paying off and that you are not completely at the mercy of the (often irrational) volatility of Wall Street.

Real estate income 0.74%) is a well-known dividend stock. It is famous for paying a rare monthly Dividend and continuously increases the amounts paid out. The company has increased its dividend for 31 years in a row, and the trend is rising.

You may have overlooked Realty Income lately. Shares are down 24% over the past five years.

Pay attention. I’ll show you how powerful dividend stocks like Realty Income can be and why the stock is a wonderful buy today.

Are dividends important? More than you think

Realty Income is a real estate investment trust (REIT). It is a company that acquires and leases real estate. In other words, it is like a landlord you can invest in, allowing you to enjoy the cash flow from real estate income without having to buy buildings. Realty Income specializes in single-tenant retail properties, where one tenant, usually a customer-facing business like a movie theater, supermarket or gas station, leases the building.

REITs must pay out at least 90% of their taxable income as dividends, so companies like Realty Income make excellent dividend stocks. Realty Income’s dividend yield is about 6% at its current share price. Now I get it. Nobody wants to be down 24% after five years. But the truth is, Realty Income’s dividend has helped soften that blow quite a bit.

While stock price has fallen by 24% after five years, the share Total returnincluding dividends, brings investors almost to break-even.


O Data from YCharts

To be fair to Realty Income, things have gone against the company over the past five years. Real estate companies have faced a generational crisis with COVID-19. On top of that, interest rates have risen sharply. That’s a problem for REITs because they rely heavily on loans to finance new property purchases. Realty Income has gotten a bad rap, mostly due to bad luck.

Ready to have your mind melted? Zoom out further and see how big a difference dividends make over time. Realty Income is way behind the S&P500 due to the share price increases after decades, it clearly outperforms in terms of dividends.

O Total Return Price Chart

O Total Return price data from YCharts

Realty Income’s share price declines are getting all the attention. Ironically, its dividends have produced strong profits over time. Again, Realty Income’s share price decline is due to bad luck (pandemic and high interest rates), not because the company is bad.

Why is the stock about to make a comeback?

I suspect Realty Income will eventually recover. First, the dividend, the most important aspect of the stock, is rock solid. Analysts expect Realty Income to earn $4.22 per share this year. That’s a dividend payout ratio of just 75% based on annualized dividends per share.

Meanwhile, many expect interest rates across the U.S. economy to fall over time. The FOMC, which controls the benchmark interest rate in the economy, hopes to lower inflation, and recent data suggests that’s exactly what’s happening. Lower rates mean cheaper loans, which is a tailwind for REITs like Realty Income.

Realty Income’s stock yield is currently near its ten-year high and its price to cash flow is near its ten-year low. This means the stock is cheap and analysts continue to expect Realty Income to grow its distributable cash flow (earnings for REITs) by a low single-digit percentage annually. Investors are looking at potentially double-digit total returns when dividends and growth are combined. A potentially higher valuation is just a bonus.

O Price-Free Cash Flow Diagram

O Price to Free Cash Flow data from YCharts

Remember, stocks like Realty Income can make you rich with their dividends. It just may take some time. Investors shouldn’t worry about the dividend, and the stock’s potential recovery is more like the icing on the cake than the main course.

In situations like this, long-term investors win.

Justin Pope does not own any stocks mentioned. The Motley Fool owns and recommends Realty Income. The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *