At first glance, the drop in Realty Income (NYSE: O) may not seem profound. A 25% drop places it barely in bear market territory, and in a world where many prominent stocks are still down 75% or more since the 2021 bear market, such a drop seems less meaningful.
However, investors need to remember that it is down 25% since before the pandemic! Although it is up significantly from its 2020 lows, high interest rates seem to have derailed a potential recovery.
Nonetheless, with interest rates now falling, Realty Income stock has begun to gain some traction. Given the state of the business, investors may want to consider buying while it is still down.
Realty Income as a business
At its core, Realty Income is a real estate investment trust (REIT) specializing in net leased single-tenant properties. Under a net lease, the tenant covers maintenance costs, insurance, and property taxes, which works in Realty Income's favor.
It has grown steadily since its founding in 1969 and now owns almost 15,500 properties in the U.S. and seven other countries. Most Americans have likely set foot in one of its buildings, as it leases to most of the U.S.'s top retailers. Home Depot, Kroger, and O'Reilly Automotive are among its most significant tenants.
Realty Income has often bought properties and leased them back to former owners to help companies raise money, giving it additional sources of income. The strategy seems to have worked well, as it benefits from an occupancy rate of nearly 99%.
However, investors likely know it best for its designation as the "monthly dividend company." True to this name, it has paid shareholders a dividend every month since initiating a payout in 1994, increasing the dividend at least once per year since inception.
Amid the stock struggles, these increases have raised its dividend yield. Consequently, the annual dividend, now at $3.16 per share, yields 5.1%. This is approximately quadruple the S&P 500 average yield of just over 1.25%.
Realty Income's financials
Moreover, considering its financials, investors probably do not have to worry about the stability of Realty Income's dividend. Its $2.6 billion in revenue for the two quarters of 2024 rose 32%. Most of that growth came from the acquisition of Spirit Realty, which added more than 2,000 properties to its portfolio.
Its normalized funds from operations (FFO) income available to common shareholders, a measure of a REIT's free cash flow, came in at $1.8 billion, or $2.12 per share. That is more than enough to cover the $1.55 per share it paid in dividends over that time.
One of the dark clouds hampering Realty Income stock may have become less of a factor with the Fed rate cut. Over the last year, the stock is up 25%, with most of that increase occurring since July. This may mean the stock will soon be ready to finally surpass its 2020 high.
Additionally, when measured against its normalized FFO, the stock sells at a price-to-FFO ratio of around 15. This makes the stock inexpensive, especially considering the continual dividend growth and the potential for a rising stock price.
It's time to buy Realty Income stock
Investors looking for growth and income should consider Realty Income stock.
Admittedly, higher interest rates are almost always a headwind for REITs. However, the stock has managed to grow its portfolio and its dividend despite higher rates. At a price-to-FFO ratio of 15, the stock is also reasonably priced.
Now that it benefits from the added catalyst of lower interest rates, more investors are likely to take an interest in Realty Income. Hence, not only will investors benefit from a rising income stream, but the company also has the potential for market-beating returns as investors should reap added benefits from a rising stock price.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Realty Income. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
