1 Magnificent S&P 500 Dividend Stock Down 31% to Buy and Hold Forever
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Like bargains? You should. Although you’re often required to pay a premium for quality, if you can get the quality you want at a lower price, so much the better!
Income-seeking investors may want to consider taking on a new position in Realty Income Corporation(NYSE: O) while this dividend stock is down 31% from its highest-ever high. The market’s just not giving this company all the credit it’s due.
Never heard of it? It wouldn’t be terribly surprising if you haven’t. It’s not exactly in a game-changing business. Indeed, it doesn’t even sell a product or service to consumers.
You’ve almost certainly visited one of its properties, though, perhaps without even realizing it. Realty Income is a real estate investment trust, or REIT. That means it owns a portfolio of revenue-bearing real estate, and passes along the bulk of its profits to shareholders in the form of dividends. REITs can hold a variety of real estate, ranging from hotels to apartment complexes to office buildings.
Even by REIT standards, however, Realty Income is a bit of an oddity for a couple of reasons.
One is the sort of property it owns. It specializes in retail real estate. Its top tenants include Dollar General, Dollar Tree, 7-Eleven, FedEx, and Walmart. With over 15,400 properties and 337 million square feet of retailing space, Realty Income is one of the biggest players of its kind.
What’s the second reason Realty Income is a relatively unique real estate investment trust? It doesn’t pay the usual quarterly dividend. Rather, it makes monthly payments, aligning with how most people incur and pay their bills.
It’s an interesting alternative to the usual pace of dividend payments, to be sure. Still… retail? The so-called retail apocalypse stemming from the advent of e-commerce certainly seems real enough. Coresight Research reports that 7,325 U.S. stores shut down in 2024 alone, with another 15,000 closures expected this year. It doesn’t look or feel like things are moving in the right direction for Realty Income, which partly explains why shares are down 31% from their late 2019 peak.
There are a couple of important details to draw out here, however.
The first is the simple fact that the retail apocalypse isn’t as much of a collapse of the brick-and-mortar side of the business as it is a refinement of it. The struggling laggards are being thinned out, while outfits like Walmart and Dollar General that are strong enough to survive are actually getting better. Walmart, for instance, is in the early stages of a five-year plan to build another 150 U.S. stores, despite its already massive domestic footprint of over 5,200 locales. Dollar General is planning to open another 575 new stores this year, even though it’s already operating over 20,500.
Indeed, Coresight points out that while 7,325 U.S. storefronts were shuttered last year, nearly 6,000 brick-and-mortar stores were opened to fill that void. As it turns out, it makes more sense for all involved parties to punt the construction, ownership, and management of these buildings to a specialist like Realty Income.
The second detail worth highlighting? The strength and staying power of this REIT’s tenants is impressive. As of the end of the third quarter of 2024, 98.2% of Realty Income’s properties were under lease. Even in the throes of the COVID-19 pandemic in 2020, this REIT’s occupancy rate held at 97.9%. Underscoring this resiliency is the fact that not only has Realty Income paid a dividend every month going back to 1970, it has raised its annual dividend payout every year for the past 30 years.
All this begs the question: Why have Realty Income shares been such subpar performers since 2019?
It’s arguably got nothing to do with its business and value, and everything to do with the economic backdrop.
Think about it. COVID-19 set circumstances into motion that led to supply chain constraints, that led to rising inflation, which ultimately kick-started a streak of interest rate increases. Not only would this raise this REIT’s costs to borrow capital, but dividend yields (which tend to follow bond yields, which reflect prevailing interest rates) are adjusted higher by lower stock prices. The speed of these economic developments has stymied this stock ever since.
The changes underpinning this weakness are finally leveling off, if not abating. For example, the Federal Reserve is at least entertaining a handful of gradual interest rate cuts over the course of the coming couple of years, while corporate bond yields have held relatively steady since late 2023. These are the seeds of relief, even if they’re not exactly blooming yet.
More important to investors interested in Realty Income, these green shoots are starting to surface while the domestic and global economies are in reasonably healthy shape. Deloitte suggests that the United States’ gross domestic product is set to grow by a respectable 2.4% this year, jibing with World Bank’s global outlook. Both these tailwinds work in Realty Income’s favor.
Just don’t tarry if you’re interested in plugging into Realty Income while its yield stands at an above-average 5.8%. Other investors are going to start connecting these dots sooner or later. Not only will this bullish interest pump up this ticker’s price, it’ll also lower your effective dividend yield on any money invested in this unique, resilient REIT.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx, Realty Income, and Walmart. The Motley Fool has a disclosure policy.
