Earlier this week, I increased my investment in Realty Income (NYSE:O). I think it’s one of the best shares to buy for investors looking for passive income from property.
I’ve been buying the stock consistently for over a year now. The company has demonstrated that it has the capacity to do well in virtually all economic environments and I think it will prove durable in the future.
Business overview
Realty Income is a real estate investment trust (REIT). In other words, it makes its money by leasing properties to tenants and then distributes the income as dividends to shareholders.
The company focuses on retail properties. That immediately raises a question of whether or not investors should be worried about the rise of e-commerce.
I don’t think they should. Realty Income looks to protect itself by leasing to tenants that are immune from the challenge of e-commerce, such as convenience stores, pharmacies, and supermarkets.
The company also looks to focus on high-quality tenants with strong credit ratings. This minimises the risk of defaults and allows the business to maintain strong occupancy rates.
Over time, the results have spoken for themselves. Realty Income has increased its dividend every three months for the last 25 years and the stock has outperformed the S&P 500 since its public listing in 1994.
Durability
I think the company’s track record is important. It indicates to me that the business has the capacity to keep increasing its dividend through all kinds of macroeconomic conditions.
The Covid-19 pandemic, the 2008/09 housing crisis, and the 9/11 attacks all happened in the last 25 years. And Realty Income kept growing its income and increasing its dividend throughout.
Right now, the macroeconomic environment is unfriendly to real estate companies in both the US and the UK. Rising interest rates are weighing on property prices and causing the market value of their assets to fall as a result.
That’s the thing I find most attractive about Realty Income, though – the company has seen it all before. There’s a real challenge for REITs at the moment, but I think it’s one the company has the know-how to deal with.
In general, I don’t think that REITs are a good choice for investors looking for spectacular growth. But I do see them as attractive passive income opportunities, especially with share prices within the sector down over the last year.
A stock I’m buying
No stock is without risk and Realty Income is no exception. The company’s strategy of focusing on high-quality tenants means that it struggles to grow its rents faster than the rate of inflation.
As a result, the business has to rely on buying other businesses to boost its earnings growth each year. That brings a risk of overpaying for an acquisition.
So far, though, the company’s management have proven to be sound operators. That’s why I’ve been buying the stock this week and I expect to buy more in the future.
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