The Smartest Dividend Stock to Buy With $1,000 Right Now
If you have $1,000 (or more) to invest today you should tread carefully. The S&P 500 index is near all-time highs and you want to make sure you own high-quality stocks in case a bear comes along. It would be even better if you could buy a stock that itself wasn't too expensively valued. Add in a big dividend yield and your list of qualifying options narrows significantly.
One stock that does meet those quality, expense, and high-dividend yield criteria is Realty Income (NYSE: O). Here's why this real estate investment trust (REIT) can turn a $1,000 investment into something much more and serve as a cornerstone for your portfolio.
What does Realty Income do?
As already noted, Realty Income is a real estate investment trust. It buys single-tenant properties and rents them out using the net lease approach. Net leases require tenants to pay most property-level operating costs. It is a fairly simple approach in the REIT sector and it allows Realty Income to focus more of its attention on growth than on day-to-day operating activities, which are largely taken care of by tenants.
The company's portfolio is heavily weighted in the retail sector, which accounts for about 73% of rents. The rest comes from industrial assets (17% of rents) and a large "other" category, which includes things like vineyards and casinos. Realty Income also invests in Europe, which makes up roughly 13% of the portfolio. The foreign exposure gives Realty Income an additional lever to pull as it looks to grow its portfolio.
There's one more key issue here and that's size. With a market cap of around $45 billion, Realty Income is roughly 3 times the size of its next largest competitor. And it owns a truly impressive 15,400 properties. That's way more than any of its peers. There are two sides to this coin. Growth will, by necessity, be slow because it requires a lot of property acquisitions to grow from such a large base. However, the company's size and financial strength (it is investment grade rated) allow it easier access to capital markets. So it can afford to be more aggressive with acquisitions and still turn a solid profit.
Why buy Realty Income?
From a business perspective, Realty Income is a very attractive story. Now add to the list of positives a dividend that has been increased annually for three decades (and counting). While the dividend hasn't grown at a huge rate, the annualized 4.3% growth rate over those 30 years has been enough to grow the buying power of the dividend at a faster rate than inflation.
But the stock has fallen by a third from its 2020 highs, pushing the dividend yield up to near-decade highs at 5.8%. So Realty Income is a well-run dividend stock that looks historically cheap right now. Which is why you'll want to buy it.
However, the key to the story is that nothing material has changed at the business to justify this big price drop. The decline is related to rising interest rates, which have indeed increased costs for REITs, but property markets will eventually adjust to higher rates just like they have in the past. And even with higher rates, Realty Income still has a cost of capital advantage relative to peers because of its scale. The biggest shift here is really in the way Wall Street views Realty Income, and REITs more broadly. The sector is out of favor and Realty Income, which was an industry darling for a while, has been particularly hard hit despite it operating in exactly the same way today as it has operated for years.
A cornerstone investment
As noted, Realty Income won't wow you with dividend growth. It is more of a slow and reliable tortoise that can be a foundational investment for a larger dividend portfolio. What's so interesting about the stock today is the negative investor sentiment around the stock that's left it trading at a historically attractive price. If you are looking to build a reliable dividend portfolio, Realty Income is a stock you'll probably want to have in the mix and now looks like a good time to buy it.
Should you invest $1,000 in Realty Income right now?
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
The Smartest Dividend Stock to Buy With $1,000 Right Now was originally published by The Motley Fool