A High-Yield Dividend Stock to Consider for Long-Term Investment

The S&P 500 index is nearing its all-time high, but the performance across different sectors has varied significantly. Over the past three years, the real estate sector has notably lagged behind the overall market, affected largely by the current high-interest rate environment.

This situation has opened up attractive opportunities for long-term investors who are looking to add reliable real estate investment trusts (REITs) to their portfolios. One REIT that stands out is Realty Income (O), which is currently trading about 29% below its peak, even though its business continues to show solid performance.

Understanding Realty Income's Business

Realty Income is a REIT that specializes in acquiring net-leased properties. In simple terms, it owns properties leased to single tenants, where those tenants handle property taxes, building insurance, and a majority of the maintenance costs.

The company currently owns around 15,500 properties, predominantly occupied by retail tenants, with smaller percentages in industrial, gaming, and agriculture sectors. Recently, Realty Income has started to expand into the data center market by partnering with top operator Digital Realty Trust.

The retail tenants in Realty Income's portfolio are generally known to be more resistant to economic downturns and not overly affected by online shopping trends. For instance, their tenants include dollar and drug stores, warehouse clubs, and home improvement retailers.

Business Performance Outshining Stock Price

It’s essential to highlight how sensitive this REIT is to interest rates. Even though Realty Income's stock price is down approximately 30% from its all-time high in early 2020, the underlying business has notably thrived.

In its most recent quarterly report, Realty Income generated $1.05 per share in adjusted funds from operations (AFFO), which serves as the real estate industry's equivalent to earnings per share. With 15,457 owned properties, the portfolio boasted an impressive occupancy rate of 98.7%.

Comparing this with the same quarter in 2019, just before reaching its peak, Realty Income reported an adjusted FFO of $0.83 per share with a portfolio of only 5,964 properties and a lower occupancy rate of 98.3%.

Numerous Opportunities Amid Solid Track Record

Despite being the largest REIT in its category, Realty Income still sees plenty of growth potential. In the U.S. alone, the net lease real estate market within its specific property types is estimated to be around $5.4 trillion, of which less than 4% is currently held by public REITs. The market in Europe, where Realty Income is also expanding, is even larger and less penetrated by REITs. This means Realty Income has enormous scope for future growth.

Realty Income’s track record underscores the effectiveness of its business model. Since its inception in 1994, the company has delivered an impressive annualized total return of 14.1%, significantly surpassing the S&P 500. It has consistently been a standout income stock, recently announcing its 129th dividend increase since going public, maintaining its dividend even during challenging times.

A Strategic Moment to Invest

Currently, Realty Income has a dividend yield of approximately 5.7%, which often represents an optimal entry point for investors looking to hold for the long term. Historically, outside of the current high-interest period and the initial phase of the COVID-19 pandemic, Realty Income's dividend yield last approached 6% back in early 2014. Following that point, it achieved annualized returns exceeding 17% over the subsequent six years.

While there is no certainty that past performance will repeat, the bottom line remains that Realty Income is a robust business with an appealing yield. It also has a promising outlook for long-term gains, particularly for those who invest when yields are high.

investment, dividends, REIT