1 Magnificent S&P 500 Dividend Stock Down 36% to Buy and Hold Forever

Investors should hesitate when one refers to a company as a “forever stock.” You can only go so far in predicting the future, and it is possible something unforeseen can derail a seemingly solid business plan.

Still, the closest thing to a forever stock is arguably about Realty Income (NYSE: O). The real estate investment trust (REIT) plays an understated but crucial role in the economy. It owns more than 13,250 properties, spanning 85 industries and five countries.

Additionally, it has struggled since the pandemic and sells at a 36% discount from its 2020 high. Given its client base and the nature of its business, it’s a company with a lucrative, growing revenue base poised to provide investors with a rising dividend for decades to come.

Why Realty Income?

Admittedly, Realty Income may not be a household name, as consumers often set foot on its properties without knowing. Instead of owning properties, companies such as Wynn Resorts, Walgreens Boots Alliance, Walmart, and FedEx utilize Realty Income’s space.

Moreover, the company operates under net lease agreements, meaning that the tenant pays for insurance, maintenance, and taxes. This helps reduce Realty Income’s expenses, increasing the profits for the company and its shareholders.

In many cases, Realty Income will buy properties owned by such companies and lease them back to the previous owner. This provides the customer with cash while becoming an income source for Realty Income.

Furthermore, Realty Income continues to provide the types of properties the market demands. With only 159 properties available for lease, its occupancy was just under 99%. This tight market prompts continued expansion; it acquired 104 properties and had 185 additional properties under development in the third quarter of 2023. This and the rent increases included in its contracts mean Realty Income’s revenue will likely continue rising.

The Realty Income dividend and stock

Investors should also remember that the company’s REIT status requires it to pay at least 90% of its net income in the form of dividends. However, payouts are more than an obligation to Realty Income, they’re a centerpiece. It bills itself as the “monthly dividend company,” and its payouts have risen at least once per year for the last 30 years.

The monthly dividend now stands at $0.2565 per share, or just under $3.08 per share annually. That amounts to a yield of almost 5.8%, more than 4 times the S&P 500 average of 1.4%.

Additionally, Realty Income can sustain this payout. Over the last 12 months, the company reported $4.15 of normalized funds-from-operations (FFO) income, a measure of a REIT’s free cash flow. This gives it enough cash to maintain and increase its payout while investing in new properties.

Admittedly, recent struggles with the stock have helped raise that yield. Over the last few years, lockdowns and, later, rising interest rates weighed on the stock and its industry. Realty Income’s P/E ratio of 40, which is well above S&P 500 averages, may also deter investors.

Nonetheless, the P/E ratio has rarely fallen below 40 in recent years. Also, because it’s a REIT, FFO is arguably a more meaningful metric to the company. For the trailing 12 months, its price-to-FFO ratio is only about 13, meaning its valuation is likely much lower than its P/E ratio implies.

Consider Realty Income stock

Ultimately, Realty Income is arguably the closest thing possible to a forever stock. The company owns the real estate where a significant amount of consumer-oriented business occurs. With that, it has developed a virtuous cycle of property additions and rising rents to foster stock price and dividend increases.

Moreover, with a low price-to-FFO ratio and higher interest rates, investors benefit from buying at a discount. As time passes, rising stock prices and dividend payouts should bring significant returns to Realty Income’s shareholders.

Should you invest $1,000 in Realty Income right now?

Before you buy stock in Realty Income, consider this:

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, FedEx, Realty Income, and Walmart. The Motley Fool has a disclosure policy.

1 Magnificent S&P 500 Dividend Stock Down 36% to Buy and Hold Forever was originally published by The Motley Fool

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