Investment Opportunity: Significant Dividend Increase Stock Suffers 13% Decline, Worth Consideration Now
Investment Opportunity: Significant Dividend Increase Stock Suffers 13% Decline, Worth Consideration Now
Realty Income (D -0.11%) has managed to enhance its dividend payouts for 30 consecutive years, which is an impressive feat. However, many investors perceive it solely as an income-generating stock due to its status as a real estate investment trust (REIT). Despite this, it does offer a substantial yield.
But if you shift your perspective slightly, you'll discover why this stock could appeal to growth-focused investors as well. Let's delve into the reasons.
What does Realty Income do?
REITs follow a specific corporate structure designed to pass income to investors in a tax-advantageous manner. As long as REITs distribute at least 90% of their taxable income to shareholders through dividends annually, they avoid corporate-level taxation. Major REITs, such as Realty Income, typically own physical properties and lease them out to tenants.
Realty Income adheres to a net lease model, making tenants responsible for most property-level costs. The majority of the company's assets are occupied by single tenants, which implies a higher level of risk in terms of income derivable from individual properties.
However, with over 15,400 properties spread across North America and Europe, Realty Income ranks as the world's largest net lease REIT. Consequently, the financial risk for the company is relatively low. Combined with its investment-grade-rated balance sheet, concerns about risk diminish even further.
Although investors generally see Realty Income as a conservative income investment, its dividend yield currently stands at an attractive 5.5%. Over the past three decades, it has boosted its payouts annually at a rate of roughly 4.3%. This is excellent if you're living off the dividend income from your portfolio, but it may not be as appealing to growth-minded investors.
But wait a moment. What if you reinvest those dividends?
How Realty Income outperforms the market
One of Realty Income's alluring characteristics for certain investors is its consistency. It's the slow, steadfast tortoise - dull, but powerful when it comes to compound growth. With income stocks, a significant portion of compound growth arises from reinvesting the dividends into additional shares. With REITs, this effect becomes even more potent if performed within a Roth IRA, since there are no taxes on the dividend.
Since the turn of the 21st century, Realty Income's stock price has skyrocketed by 470%. This exceeds the S&P 500 index's performance, which has only increased by around 300% during that period. Including dividend reinvestment, the S&P 500's overall return surpasses 530%. However, employing dividend reinvestment with high-yield Realty Income surpasses this, boasting an impressive overall return of over 2,000%.
This is an astounding figure for any company, especially a REIT with an average dividend growth of only 4.3% over the past three decades. The secret behind this remarkable achievement lies in its consistent high yields, as investors using dividend reinvestment were consistently adding a substantial number of new shares with each payment. Steady dividend growth and a significant yield combined to significantly boost the long-term total returns for Realty Income investors. And it's worth noting that the compounding effect increases even more powerfully when the stock underperforms.
Realty Income is currently down 13%
In recent weeks, Realty Income's stock price has plummeted by approximately 13%. It has plunged nearly 30% from its pre-pandemic levels. However, if your investment perspective is long-term, focusing on decades rather than short-term fluctuations, and you're comfortable looking beyond the dividend yield to the long-term potential of compound growth through dividend reinvestment, Realty Income might just be the kind of total return stock you find irresistible right now.
Investing in Realty Income's shares and reinvesting the dividends within a Roth IRA could potentially yield higher returns than the S&P 500 index, given the company's consistent high yields and dividend growth over the years.
Despite the current 13% decrease in Realty Income's stock price, long-term investors who are comfortable with dividend reinvestment might find its total return potential irresistible, given its history of strong compound growth.