I think Realty Income (NYSE:O) is one of the best passive income stocks for investors to buy. The company has an enviable record of paying dividends to shareholders.
Rising interest rates this year have been weighing on the company’s shares though. And I see an opportunity with the stock close to its 52-week low.
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Consistency
Realty Income is a real estate investment trust (REIT) – it owns and leases properties to tenants. By law, 90% of its taxable income gets paid to its owners as dividends.
This makes it a classic example of a dividend stock. And it has an enviable track record, having made monthly payments consistently for over 50 years.
The secret behind the company’s success is two-fold. First, it concentrates on high-quality tenants, which minimises the risk of defaults and uncollected rent payments.
Second, it maintains high occupancy ratios on triple net leases. This means the costs of property maintenance falls on the tenants, rather than on the landlord.
Growth
Focusing on reliable tenants has a downside though. It makes increasing rents difficult, since tenants who are unlikely to default on their agreements are highly desirable.
This means Realty Income has a challenge when it comes to growth. The main way for the company to expand its portfolio is by making further investments.
Without being able to retain earnings though, this is difficult to finance and therefore presents a risk. But this is a headwind that the company has handled well in the past.
As a result, it has increased its dividend every quarter for the past 25 years. And this looks set to continue with a $950m investment in the Bellagio set to boost its rental income.
Valuation
Realty Income is a model dividend stock. But at $56, it’s trading fractionally above its 52-week low of $55.50.
It’s not hard to see why. Rising interest rates have been a headwind for property prices, causing the value of the company’s assets to fall and weighing on its shares.
As a result, the dividend yield is now just under 5.5%. I see this as attractive compared to a 4.2% yield on US Treasury bonds, or 4.4% from a UK Gilt.
Importantly, rental demand is still strong, despite the fall in property prices. With a 99% occupancy rate, I think the stock is set to offer stable returns going forward.
A stock to buy
In my view, the best dividend stocks have two features. They are reliable, predictable businesses that are focused on returning cash to shareholders.
Realty Income meets both of these conditions. It consistently maintains high occupancy levels in its properties and its status as a REIT ensures steady dividends for investors.
Whether the company can find enough opportunities to keep growing remains to be seen. But at a 52-week low, I think the stock is well worth the risk.
