However, I rarely discussed the companies I have been purchasing in my accounts. This is because I believed that it was much better to discuss the tools of the trade and my investment philosophy and ideas, rather than focus too much in on recent investments. I never even published my investment portfolio in detail, until recently. Readers could only guess what I owned by going through articles, and checking my full disclosures.
However, through interactions with readers over the years, I have realized that some enjoy reading about specific investment ideas that I have added money to.
When I last analyzed Realty Income, I mentioned that I would only purchase it at a specific yield. Well, back on September 21 I tweeted about my purchase of the stock as I found the yield to be attractive. The company has managed to raise dividends multiple times per year since going public in 1994, and continued raising even during the dark days of the Great Recession in 2008 and 2009.
After an acquisition closed in early 2013, Realty Income raised distributions by over 19%. I like that this triple net REIT continues growing through targeted acquisitions of competitors and properties and that it is not afraid to look outside the box in order to find attractive uses of its capital at attractive cap rates of return. You are also paying for the expertise of the management team, which has done a superb job of ensuring quality tenants, diversification and keeping the properties occupied.
One of the risks behind REITs is that rising interest rates would cause investors to sell their stocks off, and purchase bonds instead. As an investor, I realize this could potentially increase the cost of capital for Realty Income, which obtains money to grow through stock or debt issuance. As long as new properties are acquired at rates of return above cost of capital however, future acquisitions should continue adding to the pool of funds available for shareholder distributions.
In addition, while interest rates would increase, they would likely do so very slowly and would likely reach about the same levels that we had prior to the 2008 – 2009 crisis first. Also, I would much rather have my money in a business like Realty Income that provides the potential to generate a high dividend yield today and the opportunity for dividend growth versus a long US Treasury Bond at a similar yield.
This is because an increasing dividend payment over time would keep the purchasing power of my income and protect it from inflation. Fixed income instruments do not do this for you. Currently, Realty Income yields 5.40% and has a ten year dividend growth rate of 4.20% per year. It trades at 16.70 times FFO ( assuming FFO of $2.40/share).
The other company I purchased was British Petroleum on September 30. In addition, I also sold a January 2015 put with a strike of $42. If the stock trades below $42 at expiration date, I would have to buy it at $42 per share. However, my effective cost would be slightly less than $37 per share. If the stock trades above $42 per share, I would end up with the equivalent of slightly more than $5 per share. The option premium received financed a portion of my purchase of BP.
Before I discuss the purchase, I wanted to discuss my history with the company. I initially purchased shares back in 2008, and considered them one of the safest dividends for current income. However, the events in 2010 led to a dividend cut, after which I sold out my position completely and reinvested the proceeds into Royal Dutch Shell (RDS.B).
I sell automatically after a dividend cut, as a means to protect myself from getting married to a company that is collapsing. I do not want to be in a position of someone who has received dividends from a company for 40 years, and is emotionally attached to the stock, and therefore ignores warning signs that the business is in trouble. This could lead to losses in investment capital, which could result in going back to work. There have been investors who hold on for too long to a lost cause, and then end up not only losing their income source but also their capital. I also do not want to end up justifying to myself that a business will bounce back, while I am experiencing the pain from losses and hoping, rather than assessing the situation with a cool head.