Regardless of your political preferences, the “Trump rally” that has pushed stocks higher since November has been a rip-roaring good time. No one ever complains about making money.
Of course, there are also no guarantees it will continue. The stock market is extraordinarily expensive after eight years of virtually uninterrupted bull market, and “The Donald’s” promises of reduced regulation and higher growth may prove harder to deliver in practice.
There are some pretty aggressive growth assumptions priced into the stock market right now, so any failure to deliver could result in a nasty correction … or even a full-blown bear market.
I’ve always been a big believer in taking a total return approach to investing, focusing on both capital gains and income. And with the capital gains looking a little more iffy than usual at current stock prices, current income in the form of dividends is more important than ever.
So with all of that said, let me introduce you to one of my very favorite dividend workhorses, conservative retail REIT Realty Income Corp (NYSE:O). Realty Income owns a portfolio of over 4,700 properties scattered across 49 states and Puerto Rico. And while the property portfolio is extremely diversified, spanning 247 tenants in 47 distinct industries, the properties all have one thing in common: a triple-net lease.
Realty Income: As Close to a Bond as You Can Get
Under a triple-net lease arrangement, the tenant, rather than the landlord, pays all taxes, maintenance and insurance. The landlord’s responsibility really is limited to cashing the rent checks and occasionally finding a new tenant or negotiating a new lease. Not bad work if you can get it!
Furthermore, most leases have automatic rent increases built in that adjust upward with inflation. So if you’re depending on the dividend to pay your bills in retirement, you don’t have to worry much about the ravages of inflation. In addition to the built-in rent escalators, REITs are natural inflation hedges as property and land prices tend to more than keep pace with rising consumer prices.
And speaking of retirement income, Realty Income is about as close to a bond as you can get in the stock market. Its triple-net leases give the cash flows excellent stability and predictability, as does the quality of its portfolio and tenant base. Realty Income tends to focus on standalone retail properties in high-foot-traffic areas. Your neighborhood Walgreens Boots Alliance Inc (NASDAQ:WBA) or CVS Health Corp (NYSE:CVS) would be a fine example.
But while the dividend may be “bond-like” in its stability, O stock has done an incredible job of raising it over the years.
Realty Income has paid 557 consecutive monthly dividends and has raised the dividend for 77 straight quarters. Since 1994, they’ve boosted the dividend at a 4.7% annualized rate, well ahead of the rate of inflation. And while 4.7% may not look like a jaw-dropping number at first, that’s enough to nearly triple the payout since 1994.
I’ve been somewhat sheepish about buying new shares of O stock over the past year. While I own shares of Realty Income in my IRA that I bought years ago — and pledged to never sell — I wasn’t comfortable dropping new money into the stock (other than regular dividend reinvestment) at O stock’s elevated prices.
Well, after the recent selloff in REITs, I’ve changed my tune.
Donald Trump’s surprise election win caused a major selloff in the bond market, which in turn caused a major selloff in REITs, including Realty Income. After the reset, O stock is essentially trading where it was at this time last year.
I suspect that the great bond selloff of 2016 has largely run its course by now. Any further move higher should be slower and steadier, which is good for Realty Income. The stock currently yields 4.2%, and I consider it a steal at any yield above 4%.
I’m the first to admit that I have no idea what direction the stock market will go in 2017. But I am extremely confident that, no matter what happens, Realty Income will still be around and still paying and raising its dividend like clockwork.
Charles Sizemore is the principal of Sizemore Capital, a Dallas-based investments firm. As of this writing, he was long O.