February 28, 2024

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Motley Fool Issues Rare “All In” Buy Alert
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Investors often view stock performance through a myopic lens, focusing only on stock price appreciation. That’s fine if a company doesn’t pay dividends, but dividend-paying stock performance should really be considered with a broader metric: total return. Realty Income (O 0.86%) helps show why this is so important and why you still might want to add this boring real estate investment trust (REIT) to your portfolio.
Dividends are a powerful tool, offering investors a way to value stocks (relative dividend yield) and a way to compound returns (dividend reinvestment). The latter point is the one that’s so important to consider if you are a long-term investor. One frequent piece of advice is to dollar-cost average by investing on a regular basis over time. If you reinvest your dividends you are, basically, doing just that. Only you don’t have to come up with the cash; the company you’ve invested in does that for you. The impact can be huge.
Image source: Getty Images.
REIT Realty Income, for example, has turned a $10,000 investment at the start of 2000 into $228,000 today. That includes dividend reinvestment. Pull out the reinvested dividends and the price appreciation alone has grown that $10,000 into “only” $61,000 or so. That’s a massive difference! Putting those numbers into percentages: The stock’s price has increased a bit over 500%. With dividend reinvestment, Realty Income’s value has grown by north of 2,100%.
Here’s where it gets really interesting. Over the same span, the S&P 500 Index has turned $10,000 into around $25,000 without dividend reinvestment. With dividend reinvestment, that figure grows to $38,000. Percentage-wise, that translates to 150% growth without the dividend reinvested and 280% with the dividend reinvested. Those numbers are nowhere near as good as the ones Realty Income put up. 
One of the biggest differences between the S&P 500 Index and Realty Income is that Realty Income has always had a higher dividend yield (materially higher at some points). That means more money being put back in to buy new shares, compounding returns over time.
O Dividend Yield Chart
O Dividend Yield data by YCharts.
To be fair here, REITs were created to pass income derived from property ownership on to investors. Realty Income, specifically, owns single-tenant retail and industrial properties that generate reliable cash flows. To avoid corporate-level taxation, REITs pass at least 90% of earnings, often more, on to shareholders as dividends. So, income is the big attraction for REITs, which isn’t quite as true for the S&P 500 Index, a list of companies that spans across industries and that contains both dividend payers and nondividend payers. Today, for example, Realty Income’s 4.8% dividend yield is well more than twice that of the S&P 500 Index. Which is actually one reason why it still might make sense for long-term investors to buy into this dividend compounding machine, assuming you reinvest those payments.
But that’s not the only reason. Roughly $38 billion market cap Realty Income is one of the largest players in the net lease niche. Net lease means that the tenant is responsible for most of the property-level costs of an asset. With a large enough portfolio, this is a very low-risk way to invest in property. Realty Income owns over 11,000 buildings. It also has a fairly diversified portfolio, with around 80% of rent coming from retail properties and the rest from industrial and “other” assets. About 10% of total rent comes from Europe. There are more diversified options out there, but Realty Income’s breakdown is fairly desirable.
Then there’s the dividend, which has been increased annually for 27 consecutive years. That makes Realty Income a Dividend Aristocrat. On top of that, the dividend is paid monthly, which increases the amount of times you dividend reinvest.
And Realty Income’s strong business has afforded it investment-grade credit ratings and an industry-leading valuation. These factors mean it has a low cost of capital, which helps support acquisition-driven growth. Add that to the REIT’s size and it can do deals that peers couldn’t manage. This should help to ensure that Realty Income remains a top performer over the long term. In other words, there’s no reason to think this dividend reinvestment machine is going to slow down anytime soon.
To be fair, Realty Income started the comparison period above with a double- digit dividend yield. That gave it a huge leg up when it comes to dividend reinvestment. However, given the still-material difference between the yield of the S&P 500 and Realty Income, and the many advantages the REIT has today versus its smaller peers, it is still an attractive name to consider for long-term investors. That includes both income-focused investors and those who aren’t usually focused on dividends.

Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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