I’ve been buying shares in Realty Income (NYSE:O) to give my monthly income a boost. The company is a US-listed real estate investment trust (REIT) that makes money by leasing retail properties.
At today’s prices, the stock has a dividend yield of around 5%. I don’t think this is the most exciting investment opportunity, but I think it’s a steady choice for consistent passive income.
Limiting risk
According to Warren Buffett, the first rule of investing is to avoid losing money. Realty Income’s approach means it’s pretty good at this.
There are two main dangers for real estate investors. The first is buildings being unoccupied for a significant amount of time and the second is tenants defaulting on rent.
Realty Income has decent protection against both of these risks, though. Its occupancy levels are consistently above 99% and its focus on high-quality tenants minimises the chances of unpaid rent.
Furthermore, Realty Income has a diversified tenant base, shielding it from losses due to tenants struggling as a result of sector-wide factors. And its portfolio is mostly let to businesses immune to disruption from e-commerce.
As a result, the stock has been one of the most stable dividend investments on the market. And I expect this to continue going forward.
Rising interest rates have been a headwind for real estate prices and Realty Income is no exception. Its share price has fallen by 13% over the last year, but I see this as a buying opportunity.
Growth
One of the challenges the business faces is growth. Quality tenants have a strong bargaining position, which gives Realty Income limited scope to increase rents.
That means the company’s main way of funding growth is by acquiring more properties. And this can be challenging for an organisation that has to distribute its rental income to shareholders.
Realty Income’s dividend has grown at around 2.5% per year since 2018. If the business can’t make the acquisitions that will allow it to grow, then the prospects for future returns look limited.
In my view, this is the biggest risk with the stock. I don’t see the possibility of unpaid rent as a significant threat, but there’s a danger of mediocre returns if the business can’t find ways to grow.
According to management, though, theres’s still room to grow. Its latest shareholder presentation states that the company acquires less than 10% of the opportunities it considers.
This indicates there’s still scope for further acquisiitons. As a result, I’m looking to buy the stock today and be patient with it as the business continues to move forward.
A stock to buy?
I’m expecting to buy Realty Income shares for my portfolio later this month. I expect the monthly dividend to be a decent boost to my monthly income for the foreseeable future.
The stock is unlikely to post the biggest gains on the stock market. But as a solid source of passive income, I think it’s a quality proposition.
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