A High-Yield Dividend Stock Worth Considering

The S&P 500 index is nearing its all-time peak, yet there are segments within the stock market that are not sharing in this success. One notable area is real estate, which has significantly lagged behind the overall market for the past three years. This underperformance is largely attributable to the prevailing high-interest rates.

As a result, savvy long-term investors are presented with opportunities to add resilient real estate investment trusts (REITs) to their portfolios. One such REIT that stands out is Realty Income (O 1.01%), which is currently about 29% below its all-time high, despite demonstrating solid business performance.

Understanding Realty Income's Business

Realty Income operates as a real estate investment trust, commonly referred to as a REIT (pronounced "reet"). This trust focuses on net-leased properties, meaning it owns properties leased to single tenants who take on the responsibility for property taxes, insurance, and the majority of maintenance tasks.

Currently, Realty Income owns approximately 15,500 properties, with around 80% being retail-based tenants, along with smaller portions in industrial, gaming, and agricultural properties. The company has also started to branch into data centers, collaborating with leading operator Digital Realty Trust (NYSE: DLR).

The retail tenants within Realty Income's portfolio are generally resilient during economic downturns and are less affected by the rise of e-commerce. Examples of such tenants include discount stores, drugstores, warehouse clubs, and home improvement chains.

Current Business Performance

An important aspect of Realty Income's performance is how its business has actually strengthened despite the decline in stock price. While the stock is down about 30% from its peak in early 2020, the company has seen impressive business results.

In the latest quarter, Realty Income reported an adjusted funds from operations (AFFO) of $1.05 per share, which is the real estate equivalent of earnings per share. The company managed to maintain a high portfolio occupancy rate of 98.7%, owning a total of 15,457 properties.

For comparison, during the same period in 2019, just prior to reaching its previous high, Realty Income's adjusted FFO was $0.83 per share, with ownership of only 5,964 properties and a slightly lower occupancy rate of 98.3%.

Growth Potential and Track Record

As the largest REIT in its field, Realty Income still has significant room to grow. In the United States alone, the market for net lease properties within Realty Income's focus is estimated at around $5.4 trillion, with less than 4% currently owned by public REITs. This indicates that there are plentiful opportunities for expansion. Additionally, Realty Income is also active in the European market, which presents even larger potential due to lower REIT penetration.

Realty Income's performance confirms the strength of its business model, delivering annualized returns of 14.1% since 1994 and outperforming the S&P 500 in the process. Its reputation as an income-generating stock is further strengthened by the fact that it has declared its 129th dividend increase since going public and has never reduced its dividend, even during challenging economic times.

Favorable Investment Timing

As of now, Realty Income offers a dividend yield of around 5.7%, which is typically seen as an attractive entry point for long-term investors. Besides the current high-interest climate and a brief dip at the onset of the COVID-19 pandemic, the last time Realty Income's dividend yield approached 6% was in early 2014. Following that period, the company generated annualized returns exceeding 17% over the next six years.

While it is impossible to guarantee that similar returns will occur this time, it is clear that Realty Income presents a solid investment opportunity, given its robust business model and appealing yield. The track record suggests that investing during high-yield periods is a smart strategy for long-term growth.

dividend, realestate, investment