real estate income (NYSE: O) Has been a reliable dividend stock for long-term investors. It is one of the world's largest real estate investment trusts (REITs), pays monthly dividends and has raised its payout 128 times since its initial public offering in 1994. Its forward yield of 6% is also much higher than the current yield of 4.8% on the 10-year Treasury note.
But should investors expect real estate income to generate millionaire gains over the next decade? Let's review its business model and historical returns to find out.
As a retail REIT, Realty Income buys a large number of commercial properties, rents them out, and shares the rental income with investors. REITs must distribute at least 90% of their pre-tax profits to investors as dividends to maintain a favorable tax rate.
As of the end of the third quarter of 2024, Realty Income had 15,457 properties in all 50 states, the United Kingdom and 6 European countries. That number is up from 13,458 properties at the end of 2023, as the company acquired a slew of new properties through its January 2024 acquisition of Spirit Realty. Realty Income primarily leases its properties to recession-resistant retailers. Its top tenants include Dollar General (3.3% of its annualized contracted rent in the third quarter), walgreens (3.3%), dollar tree (3.1%) and 7-11 (2.5%).
Some of Realty's largest tenants - including Walgreens and Dollar Tree - have struggled over the past few years due to weak sales and store closures. But it has always offset this pressure by offering more leases to stronger retailers, and its occupancy rate has never fallen below 96% since listing. Occupancy rates in the first nine months of this year remained at a healthy 98.7%, while 2023 and 2022 occupancy rates are at 98.6% and 99% respectively.
REITs typically report profit growth through adjusted funds from operations per share (AFFO) rather than earnings per share (EPS). Realty Income's annual AFFO per share continued to grow at a compound annual growth rate (CAGR) of 5% from 2013 to 2023, despite market jitters due to the pandemic, geopolitical conflicts, inflation, and rising interest rates.
The company expects 2024 AFFO to grow 4% to 5%, to $4.17 to $4.21 per share. This should easily cover its forward annual dividend rate of $3.17 per share.
Realty Income's stock price has increased 173% over the past 20 years. That might not sound all that impressive, but after factoring in reinvested dividends, it's a total return of 732%. This rally would turn a $10,000 investment into approximately $83,200. During the same period, S&P 500 Index The total return is approximately 680%.
Realty Income still looks cheap at $53, trading at 13 times expected 2024 AFFO. That's because rising interest rates make it more expensive for REITs to buy new properties and adversely affects tenants, compressing their valuations. High interest rates also make risk-free CDs and Treasury bills more attractive income investments than REITs and other high-yield dividend stocks.
But as interest rates fall, real estate income may command higher valuations. At the end of 2021, it was trading at $71.59, which was 20 times that year's AFFO.
Assuming Realty Income's AFFO grows at a CAGR of 5% from 2024 to 2034, it will be trading at 20 times AFFO by the final year. If that happens, its stock price could rise about 157% to $136 over the next 10 years. It may also continue to raise its dividend to keep the yield near its historical level of about 5%.
For income-oriented investors, this will be a steady long-term gain, but it won't turn a new $10,000 investment into something close to $1 million. So while Real Estate Income is a solid long-term investment, it's definitely not a millionaire-maker stock.
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Leo Sun serves in the Real Estate Revenue department. The Motley Fool has an interest in and recommends Realty Income. The Motley Fool has a disclosure policy.
Is Real Estate Income a Millionaire Maker Stock? Originally posted by The Motley Fool