This REIT will bring income and stability to my portfolio.
It’s been a historic month: a gunman nearly assassinated a former president, while the current president surprisingly announced he would not seek reelection.
These two events have added to economic uncertainty in the country caused by already high inflation and interest rates, as well as raising concerns that the stock market (which suffered its worst day in years earlier this week) may crash.
I don’t know if a crash will happen, but I’m taking steps to prepare for it if it does. I’ve saved up cash and have some defensive stocks like Realty Income (O 1.24%) in my portfolio to cushion the blow. Here’s why I think this is a great investment in uncertain times:
Solid base returns
As its name suggests, Realty Income is a real estate investment trust (REIT) that pays a very stable dividend, and the company recently declared its 649th consecutive monthly dividend.
Since the company went public in 1994 (30 consecutive years), it has increased its dividend 126 times, including the past 107 consecutive quarters of increases. During this period, the dividend has grown at a compound annual rate of 4.3%.
The REIT’s dividend yield is currently 5.5%, several times higher than the 1.3% of the S&P 500. This high payout ratio provides investors with a very stable base income.
The dividend is built on very strong fundamentals: the company generates very stable cash flows supported by long-term net leases. Meanwhile, the company’s dividend payout ratio is conservative for a REIT, at less than 75% of adjusted operating cash flow (FFO).
Additionally, the company is one of only eight S&P 500 REITs with two investment-grade bond ratings of A3/A- or higher. The company’s fortress-like balance sheet helps protect it during market downturns.
Low volatility
Realty Income’s combination of stable earnings and solid dividends makes it one of the S&P 500’s least volatile stocks.
Image credit: Realty Income.
Its beta of 0.5 indicates it is half as volatile as the overall market. It also has a strong track record of growth in more challenging economic times: Realty Income has achieved positive earnings growth in 27 of the past 28 years (the only exceptions being during the financial crisis). It was one of the few REITs to achieve positive earnings and dividend growth during the 2020 pandemic.
The company is in a strong position to continue to perform well through the next downturn: About 90% of its rent comes from tenants in industries that are recession-proof or insulated from the pressures of e-commerce, such as grocery stores, convenience stores and dollar stores.
Visible growth
The REIT should have no problem continuing to grow during the next market crash, as FFO per share should grow roughly 2% annually thanks to inherent rent accretion factors, such as rent accretion factors, and acquisitions that can be funded with cash retained internally after paying dividends.
However, the company has ample balance sheet capacity to fund acquisitions externally. The company estimates that every $1 billion of externally funded investment will increase FFO per share by about 0.5% annually. The company conservatively expects FFO per share to increase by 4% to 5% annually, adding up internal and external factors.
Realty Income has already secured strong base growth this year: It completed its $9.3 billion acquisition of Spirit Realty earlier this year, and that deal alone should be more than 2.5% accretive to FFO per share in 2024. Add in rising rents and an expected $3 billion in additional acquisition closes this year, and the REIT is on track to grow FFO per share by more than 4%, despite interest rate headwinds.
Portfolio Stabilizer
While Realty Income’s stock price is not immune to market crashes, its low volatility means it is unlikely to fall as sharply as the broader market during a market downturn. Meanwhile, the company offers attractive underlying income from its dividends, which are expected to grow over time.
These factors should provide stability during future market turmoil, which is why I am expanding my position in this high-yield REIT in my portfolio.
Matt DiLallo invests in Realty Income. The Motley Fool invests in and recommends Realty Income. The Motley Fool has a disclosure policy.
