Diversification within an investment portfolio can provide investors with some downside protection from an entire sector of the stock market entering a downturn. While consumer and technology stocks often grab headlines due to their well-known brands and exciting growth stories, exposure to real estate can help round out a portfolio.
Some investors prefer to gain exposure to real estate by purchasing investment properties. For those who are not interested in owning real estate, there are ways to reap the benefits of owning real estate within a stock portfolio. Real estate income (NYSE:O) is a company that investors should consider. However, before you make an investment decision, there are four things you should know about Realty Income before adding it to your portfolio.
1. It’s “The Monthly Dividend Company”
Many companies pay a monthly dividend, but Realty Income puts this right into its company’s slogan, calling itself “The Monthly Dividend Company.” However, this is more than just a slogan. Realty Income has increased its dividend for the 29th consecutive year, showing investors that the company is serious about returning capital to its shareholders.
Dividends make a significant difference in shareholder returns. For example, purchasing 1,000 shares in 2013 for $37,330 would have been worth $57,420 at the end of 2023 if one only calculated the increase in the stock price over that period. Factoring in dividends gives an additional yield of $28,430.
2. Realty Income is a REIT
One of the reasons Realty Income puts a lot of emphasis on its monthly dividend is the company’s structure as a real estate investment trust (REIT). This classification means that Realty Income must distribute at least 90% of its taxable income to its shareholders as dividends.
This distribution obligation gives investors a little more security that the dividend will be maintained. However, there are circumstances under which a pause could be taken (this happened during the pandemic for some of Realty Income’s competitors), but in general you can count on dividend income from REITs.
3. There is potential momentum in the coming years
Rising interest rates impact every business. There could be an advantage for a company like Realty Income in the coming years. Many companies are currently paying off their debt at very low interest rates. The next time these companies need to tap the debt markets, interest rates will be much higher. This increases the attractiveness of a type of sale called a sale-leaseback transaction.
In simple terms, a sale-leaseback transaction occurs when a company sells its property and then rents it from the buyer. This could be a win-win for both Realty Income and a potential partner. Realty Income would be able to acquire and lease back new properties, while the sellers of the properties would have additional capital on their balance sheets as a result of the transaction.
4. Realty Income has a well-diversified portfolio
A severe recession can be a potential risk for a company like Realty Income. If its customers suffer a downturn in business and are unable to pay their rent, Realty Income will feel the impact.
To combat this, the company has diversified its portfolio to protect it from an economic downturn. In fact, 29% of Realty Income’s properties are grocery stores, convenience stores and dollar stores. While these industries could certainly feel an economic downturn, they are likely to be more resilient than discretionary industries such as entertainment. Realty Income estimates that 89% of its total rental assets are resilient to economic downturns.
Realty Income is also diversifying internationally – 13% of its rentals come from the UK, and the company has invested around $10 billion in real estate in Western Europe since 2019. Including the UK, 15% of the total annual rent comes from Western Europe.
So is Realty Income a buy?
For many investors, finding quality REITs is the easiest way to gain exposure to real estate in an investment portfolio. When it comes to REITs, Realty Income is an attractive choice. The company has a long track record (it has delivered an average annual return of 14% since its IPO), and its commitment to increasing its dividend means shareholders can expect the value of their shares to increase over time.
Should you invest $1,000 in Realty Income now?
Before you buy shares of Realty Income, consider the following:
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Jeff Santoro has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
“4 Things to Know About Real Estate Stocks Before Buying” was originally published by The Motley Fool