Real estate income (NYSE:O) has done a fantastic job creating value for its shareholders over the years. The Real Estate Investment Trust (REIT) has delivered a compound annual total return of 13.9% since listing on the New York Stock Exchange in 1994.
A key factor driving these returns is the company’s steadily rising monthly dividend. Realty Income has increased that payment 124 times since going public, increasing its payout at a compound annual rate of 4.3%.
The REIT‘s dividend currently yields about 6%. That attractive passive income stream is one of many factors that make it a screaming buy right now.
A convincing entry point
Realty Income’s dividend is approaching an all-time high:
As the chart shows, the payout is nearing the highs seen late last year and during the pandemic-induced sell-off of 2020. The payout is much higher than the 4% to 5% average over the past decade.
The main factor driving the REIT’s higher returns is its lower valuation. Realty Income expects to generate $4.13 to $4.21 per share in adjusted funds from operations (FFO) this year. That implies growth of 3.3% to 5.3% compared to last year’s level. With a share price recently around $51 per share, it trades for just over twelve times FFO and an implied real estate capitalization rate of more than 8%.
Those are dirt cheap levels, compared to the broader market and current market cap rates. The S&P500 is trading at more than 21 times its value future price-earnings ratio (P/E).While the Nasdaq100 is even more expensive: more than 27 times future profits. Meanwhile, Realty Income has acquired a single tenant net rent real estate at a maximum interest rate of around 7% in recent months.
A potential needle-moving catalyst on the horizon
Higher interest rates are the main reason Realty Income trades for a higher dividend yield and a lower valuation. The REIT’s stock price has lost about 30% of its value since peaking in early 2022, just before the Federal Reserve began raising rates. That’s because real estate values ​​are highly correlated with interest rates.
As interest rates on lower-risk investments such as government bonds rise, investors demand higher returns on higher-risk investments such as real estate. As a result, property values ​​decline, increasing income yields.
However, these headwinds should diminish in the coming months. The Federal Reserve has said it expects to start cutting rates this year, which will likely mean three cuts of 0.25% to interest rates. federal funds rate, with more to come in 2025 and 2026. Although the Fed has had to delay expected cuts due to persistently high inflation, it is likely to deliver on promised cuts as cost pressures ease. Rate cuts would likely boost real estate values, which should boost Realty Income’s stock price.
Visible growth ahead
Realty Income doesn’t need the Fed to grow value for investors. The REIT expects to grow its adjusted FFO 4% to 5% annually over the long term. That should allow the country to continue to steadily increase its dividend.
It expects rents for its existing properties to rise by around 1% per year, driven by contractual rent increases and the ability to secure higher rents when existing leases expire. Additionally, Realty Income has the financial flexibility to continue acquiring income-producing properties.
The company has a huge total market opportunity ($5.4 trillion in the US and $8.5 trillion in Europe), which is growing as it continues to expand into new real estate sectors. (Data centers, gaming facilities and additional European countries have been added in the past year.)
Healthy total return potential, even without the Fed
At a minimum, Realty Income will provide investors with a 6% annual income yield (and growing). While earnings are expected to grow 4% to 5% annually, it should deliver total annualized returns of more than 10%, assuming the valuation ratio remains unchanged.
Furthermore, the stock price has significant additional upside potential as the Federal Reserve begins to cut interest rates. These factors make Realty Income look like a screaming buy right now.
Should you invest €1,000 in real estate income now?
Consider the following before purchasing shares in Realty Income:
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Matt DiLallo has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
These beautiful passive income stocks are a screaming buy right now, originally published by The Motley Fool
