Shares of Real estate income (NYSE:O) moved lower on Wednesday in response to rising Treasury yields, indicating that investors think rates could rise, or at least stay high, under the Trump administration. That condition would pose two challenges for the Real Estate Investment Trust (REIT).
As of 1:43 PM ET, the stock was down 3.8%, in line with a broader decline in real estate stocks. The Real Estate Select Sector SPDR Fund (NYSEMKT: XLRE) at the same time fell by 3.4%, while the S&P500 rose by more than 2%.
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REITs like Realty Income generally struggled Wednesday due to higher Treasury yields, which portend higher interest rates. Bonds compete with REIT stocks like Realty Income, which pay out more than 90% of their profits as dividends, and higher bond yields could lure dividend investors back into bonds. Realty Income has long been a popular dividend stock as it pays monthly dividends and currently offers a 5.4% yield.
In addition, Realty Income has a resilient business model because it uses triple-net leases and typically leases its thousands of standalone retail properties to recession-resistant chains such as convenience stores and drugstores.
The other reason rising interest rates are a challenge for Realty Income is that the company borrows money to buy new properties, so higher interest rates will increase interest costs.
The good news for shareholders is that Realty Income should be shielded from major changes during the Trump administration. Apart from interest rates, the company is relatively well protected against shifts in the economy at a macro level.
Considering this, investors could take the opportunity to buy the stock at a discount as the 5.4% dividend yield looks attractive given its track record.
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