Recent Buy :: Realty Income Corporation

One of the sectors missing in my dividend portfolio has been REITs, primarily because my portfolio has been built in a taxable account and it is recommended to hold REITs in a tax-advantaged account.

To address that gap, my plan has been to establish my REIT holdings in a new Rollover IRA that is being funded via a lump sum distribution from an old employer pension plan that has become fully vested. Unfortunately, there have been a few snafus with that process and it is taking longer than anticipated.

Starting with REITs

Despite knowing that the rollover is going to take at least another 4-6 weeks based on the distribution date from the employer plan, I’ve continued to keep an eye on the REITs that have been on my watch list.

The one that has been getting the majority of my attention lately is Realty Income Corporation (O).

In many people’s eyes, Realty Income is one of the staples for anyone that desires exposure in the REIT sector. They are known as the “monthly dividend company” and have an impressive 25+ year history of paying an increasing dividend.

Realty Income Purchase

Realty Income would have been included in my portfolio from the beginning if I were investing in a tax-advantaged account, and after missing out when the price had dropped down around $53/share earlier in the month I decided on a new plan of action.

Years ago I had experimented with a trading approach based on seasonality–which at the core is about analyzing the trends that stocks tend to have over certain periods of time every year. Needless to say that experiment was largely a failure, however the funds were still invested in a few non-DGI stocks in an old Roth IRA at TD Ameritrade.

The new plan of action that I decided upon was to sell a portion of those holdings to have a little “dry powder” to invest in Realty Income. I didn’t sell off everything in that account as I have been allowing my younger son to use that account to begin learning about investing and researching stocks to buy–and giving him the green light to make real trades as he sees fit.

Realty Income tends to trade in a fairly narrow range, and I decided that a dip below $55/share would provide a good entry point and entered in a limit order.

Here is a snapshot of my $O purchase:

The 31 shares will add $81.84 in forward dividend income to my portfolio.

One of the normal guidelines that I look at before buying a stock is for a P/E ratio below 20, however with REITs you also want to look at the price to adjusted funds from operations (P/AFFO).

Taking a look at Realty Income, they have a historical normal P/AFFO ratio of 18.6 and are currently trading at a 17.6 P/AFFO ratio which supports my feeling that an entry around $55/share is a fair value.

Utilizing some of the charts and features within F.A.S.T Graphs, I took a look at their forecast calculator to see what the return would look like if Realty Income moves back towards their normal P/AFFO ratio. The chart below shows a total annual ROR of 13.82% if they are able to return to that ratio by the end of next year.

Certainly there are no guarantees, and that is only representative of the potential forecast. However, with my focus on dividends, I am not too concerned with that forecast as long as they continue to pay out that dividend like clockwork on a monthly basis.

Over their 25+ year history of paying an increasing dividend, they have typically had 2-3 dividend increases–albeit very minor increases–throughout the year.

The 7-year average dividend growth rate is 5.9% which like my recent purchases of AFLAC and Johnson & Johnson is a nice and steady growth rate for a company with a long track record of increasing their dividend.

Performance Results

One of the features that I’ve enjoyed using as part of my F.A.S.T Graphs trial has been their performance results. The information below dynamically updates based on the time period you select on the chart, and it provides a review of how your investment would have performed in comparison to an investment in the S&P 500.

While that may not always be an appropriate comparison for dividend stocks, it is a benchmark that many people reference so I find it interesting to review that comparison.

Personally, the fact that this also includes a quick review of the stock’s dividend growth, payout ratio, and simulated YoC is also quite beneficial as these are key metrics that I am interested in as part of my purchase guidelines.

As you can see above, over the 7.5 years represented, Realty Income returns over 2x the dividends received from the S&P 500 but that the annualized rate of return without dividends lags well behind the S&P 500. With the combined growth and dividends, that gap narrows and Realty Income has returned a respectable 10.1% annualized ROR.

Summary

Like my other recent purchases, Realty Income may not be the most dazzling purchase but then again that really isn’t necessarily what dividend growth investing is all about either.

With a long track record of paying an increasing dividend and a current 4.8% dividend yield, Realty Income will provide a nice consistent payout on a monthly basis and add over one share per year with reinvested dividends–and that will only continue to grow over time.

With interest rates rising and people concerned about when the looming bear market will arrive, REITs may not be the most attractive sector to be entering. They took a beating earlier in 2018, which would have been a great entry point as many have demonstrated a nice recovery since early in the year.

However, looking back at how Realty Income performed back in 2008-2009 you will see the key factor being that their dividend continued to be paid out every month and they remained consistent with their dividend increases.

Overall, I am happy to have dipped my toe into the REIT sector and am pleased with an entry below $55/share.

What do you think about Realty Income and/or REITs in general?