Investing in high-growth businesses can be tempting because these stocks are often perceived as fast ways to build wealth. However, growth stocks tend to carry a lot of volatility — and some investors may find it hard to stomach their frequent ebbs and flows.
Long-term investors understand that wealth is not built overnight. Identifying efficient businesses that are being managed by quality leadership teams is a great first step to building a strong portfolio. Furthermore, picking investments that deliver steady streams of dividend income can also be an underrated strategy.
One company that I think checks both of these boxes is Realty Income (O -0.62%). Scooping up some shares now could lay the foundation for lucrative long-term gains.
The gift that keeps on giving
Realty Income is a real estate investment trust (REIT), and as such, it’s required to pay out 90% of its taxable income to shareholders each year. For this reason, REITs tend to offer high dividend yields.
Among Realty Income’s unusual features is that it pays its dividends on a monthly basis. And given the company’s impressive streak of more than 100 consecutive quarters of dividend increases, it’s easy to understand why investors may want to hold the stock for the long term.
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Don’t miss the forest for the trees
Realty Income is a retail REIT, making its business susceptible to consumer shopping patterns. More specifically, the rise of e-commerce could be viewed as a threat to Realty Income’s business. Additionally, given the macroeconomic headwinds of inflation and higher borrowing costs due to increased interest rates, many consumers have significantly cut back on their discretionary spending.
Some might be concerned that this could leave some of the retail chains that lease Realty Income’s property struggling to cover their rent payments. While these points make sense on the surface, a deeper analysis of Realty Income’s operation may alleviate these concerns.
Realty Income’s tenants include downturn-resistant retail outlets such as Walgreens, Dollar General, and Dollar Tree, as well as big box discount retailers including Walmart and BJ’s. There is an argument to be made that if the economy begins to slow down, those retailers could experience higher shopping volumes — making Realty Income a business that could possibly benefit in this situation too.
Another key performance indicator to look at for REITs is occupancy rate — the percentage of rentable space that is filled with tenants. As of the end of the third quarter, Realty Income’s occupancy rate was 98.8%. Going back to the Great Recession between 2008 and 2009, Realty Income’s occupancy rate hovered around 97%. I see this as a decent proxy for the company’s strength during challenging economic periods.
Realty Income stock looks dirt cheap
As of the time of this writing, Realty Income stock trades at a price-to-book (P/B) ratio of 1.4 — well below its 10-year average of 2. My hunch is that some investors have soured on Realty Income given the company’s exposure to policies that can meaningfully impact that macro economy.
Keep in mind, office REITs are suffering from the aftereffects of the pandemic and the expansion of remote work that it led to. Nevertheless, Realty Income is an entirely different business with its own set of risks and potential catalysts. For this reason, I view the sell-off in its stock as shortsighted.
O Total Return Level data by YCharts.
The chart above illustrates the total return of a $1,000 investment in Realty Income stock since its initial public offering in 1994. With dividends reinvested, that $1,000 initial outlay would have grown into a position worth more than $50,000 today. Not only does this underscore the power of compounding, but it also highlights the contribution of its monthly dividends.
With the stock trading at bargain valuation levels, I think now is a terrific opportunity to scoop up some shares.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool has a disclosure policy.
