The retail REIT is still a reliable investment in an unpredictable market.
Over the past few months, the Trump Administration’s unpredictable tariffs, the intensifying trade wars, and fears of a global recession drove many investors away from higher-risk stocks. Elevated interest rates also kept them locked into certificates of deposits (CDs), T-bills, and bonds.
In this kind of market, there is somewhat less interest in buying dividend stocks. However, there’s still one stock worth buying with both hands as the bulls seek other alternatives: the real estate investment trust (REIT) Realty Income (O 0.02%). Here are five solid reasons Realty Income remains an excellent investment in this choppy market.
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1. Realty Income has scale and diversification
Realty Income is a retail REIT that purchases lots of properties, rents them out to businesses, and splits that rental income with its investors. REITs need to pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate.
REITs can struggle if they’re too exposed to a single tenant or a struggling sector. However, Realty leases its 15,621 properties to 1,565 different clients in over 89 industries. That diversification and scale, which further improved after it merged with its smaller competitor Spirit Realty Capital last year, should insulate it from economic downturns.
Moreover, Realty Income is a triple net lease REIT, which means its tenants are responsible for covering all of their own real estate taxes, insurance costs, and maintenance fees. That streamlined business model shields it from any unexpected expenses.
2. Realty Income’s stronger tenants can offset weaker ones
Realty Income prefers to rent its properties to recession-resistant retailers, like convenience stores, grocery stores, and discount stores. Its top tenants in 2024 included Walgreens, 7-Eleven, Dollar General, and Dollar Tree, but no single tenant accounted for more than 3.5% of the company’s annualized rent.
Some of those tenants, including 7-Eleven, Walgreens, and Dollar Tree, struggled with store closures over the past few years. However, other tenants, like Dollar General, Walmart, and Home Depot, are still opening new stores.
The growth of Realty’s stronger tenants should offset the declines of its weaker ones. That’s why its occupancy rate has never dropped below 96% since its initial public offering (IPO) in 1994. Its year-end occupancy rate rose from 98.6% in 2023 to 98.7% in 2024.
3. Realty Income pays rising monthly dividends
Realty Income pays monthly dividends and has raised its payout 130 times since its IPO. It pays a forward yield of 5.6%, compared to the 10-year Treasury’s 4.3% yield.
Realty’s adjusted funds from operations (AFFO), which REITs use to track their profitability, rose 4.8% to $4.19 per share in 2024. It expects that figure to rise 0.7%-2.1% to $4.22-$4.28 per share in 2025. That should easily cover its forward annual dividend rate of $3.22 per share.
4. Realty Income looks cheap relative to its industry peers
At $57 per share, Realty Income trades at just 13 times the midpoint of its AFFO estimate for 2025. Vici Properties, another well-run REIT that mainly focuses on casinos and other experiential properties, trades at 14 times this year’s AFFO. Agree Realty — a smaller retail REIT that serves big-box retailers, supermarkets, off-price retailers, and drugstores — trades at 18 times this year’s AFFO.
5. It will profit from declining interest rates
Lastly, Realty Income will attract more investors as interest rates decline. It struggled in 2022 and 2023 as rising interest rates made it more expensive to purchase new properties, but gave CDs and T-bills higher yields than its monthly dividends.
However, the Federal Reserve cut its benchmark rates three times in 2024 and will likely reduce those rates again this year. As those rates come down, Realty can accelerate its expansion again and attract more income-seeking investors. Therefore, it makes sense to load up on Realty’s stock before those rate cuts happen.
Leo Sun has positions in Realty Income and Vici Properties. The Motley Fool has positions in and recommends Home Depot, Realty Income, and Walmart. The Motley Fool recommends Vici Properties. The Motley Fool has a disclosure policy.
