Realty Income's Strategic Moves and Dividend Growth Strategies for Retirement Portfolios

Realty Income: Setting Itself Up For A Great Future (NYSE:O)

It has almost been a year since I last wrote about Realty Income Corporation (NYSE:O). The stock hasn't gone anywhere since, but we believe it is highly likely to continue to provide stable gains and cash flow to investors for years to come. Realty Income is a dividend stock that helps you sleep at night knowing that your money should compound slowly over time. It provides you with that sweet cash flow every month that will hopefully be sufficient to pay you a handsome extra amount for you to enjoy your retirement or to just pay your living expenses while you are still young. Currently, Realty Income has a 5.89% dividend yield. In our previous article, we mentioned that we believe Realty Income provides an interesting opportunity whenever the company has a yield above 5%, as long as the fundamentals don't change too much. In this article, we will take a look at this wonderful Dividend Aristocrat. We will do this by adding some easy-to-understand visuals and will provide you with an additional twitch to improve your cash flow even further! I'm going to be frank with you, Realty Income has underperformed for a while now, pretty much ever since the Fed started raising interest rates, which we discussed in our previous article as well. Let's be clear, I get it. Underperformance isn't fun, especially not when you see hot AI stocks going up 5-10% daily. But, that's not why you buy Realty Income. You invest in Realty Income for your steady long-term cash flows and for that slow and steady increase. After all, investing is a marathon, not a sprint. It is clear that Realty Income isn't as hot of a stock anymore as it was a couple of years ago. Heck, even compared to last year, I'm seeing a lot more negativity around the stock on social media and even here on Seeking Alpha. Nevertheless, Realty Income is a blue chip REIT, which will inevitably go back to its former glory days and the eventual mean reversion once the Fed starts cutting rates. Poor performance of a stock makes investors question themselves. Don't be in doubt about a great stock like Realty Income, this is a long-term stock, and you should view it that way. No, you won't get the 10% rise in a day, but you also won't suffer from a 50% drawdown in a month as some high-growth stocks will experience. Now, enough with the negativity, and let's get into the article. Realty Income is one of the oldest publicly traded REITs available on the market. As the company pays a monthly dividend, it makes it an excellent income-generating stock for people looking to hold a stock for decades. Below, you can see the dividend and the annual increase in percent starting in 2013. As can be seen, the dividend has steadily increased for over a decade. According to Seeking Alpha, the total dividend income from Realty Income for 2024 is expected to be $3.15 per share. As things stand, that would be another close to 3% increase year-over-year. As can be seen in the chart above, the company has increased its dividend at a steady pace. This results in a 5-year dividend CAGR of 3.05% and a 10-year dividend CAGR of 3.61%. The dividend CAGR since inception is around 4.3%, so it is clear that over the last years, dividend growth has slowed down a bit compared to the early years. Furthermore, it is worth taking a look at the yearly dividend expectations and what Realty Income might provide you in 5, 10, or even 25 years. While these cases haven't changed a lot since last year, it is worth noting that the long-term inflation expectation from the bond market, as per the 10-year Treasury Rate (US10Y), is currently at 4.227%. This is up from the 3.96% when we last wrote about Realty Income. All cases are based on the current share price, which is exactly $55 at the moment of writing this article. Bear Case: For the bear case, we used a 2% dividend increase year-over-year. Currently, this would give a 5.84% yield on cost in 2025 and almost a 9.58% yield on cost in 2050. Base Case: For the base case, we decided to use a 3% dividend increase. While this is below the 3.48% 10Y dividend CAGR, it is in line with the last 2 years of dividend increases and Realty Income. This would give a 5.90% yield on cost in 2025 and a 12.35% yield on cost in 2050. Bull Case: For the bull case, we picked a 4% dividend increase, which is ambitious, but that's what a bull case is for. This would give a 5.99% yield on cost in 2025 and a close to 18% yield on cost in 2050. With the current 10-year treasury rate sitting at 4.23%, it is important to note that we must demand a sufficient return for the risk one is taking when buying Realty Income. As such, some of you might prefer a larger margin of safety, to help you visualize this, I'll also show the same table but with Realty Income based on a $50 share price. Of course, the return won't only come from dividends. When investing, we hope to see a nice overall return. As such, we want the stock to appreciate over the years (at least once we are fully positioned). As long as you don't need the dividend to live off, it is great to reinvest the dividend to buy more stock. Stock appreciation and dividend reinvesting combined can give you the beauty of the compound effect, also known as the snowball effect. This is basically the effect created by rolling over the principal and investment returns for continuous investment to generate even greater returns. Realty Income is up over 500% since 1994, not too shabby if you ask me. Now, let's take a look at Realty Income's Real Estate Portfolio. Realty Income is one of the best-known REITs. Realty Income has robust fundamentals but struggled over the last years due to macroeconomic headwinds alongside elevated interest rates, which have been dreadful for REITs. Nonetheless, Realty Income isn't backing down. They continue to execute and have a growing portfolio of real estate in both the United States and Europe, currently counting over 15,450 commercial properties leased to over 1,500 clients. A year ago, it held just 12,400 commercial properties, which were under long-term, net lease agreements. This shows that Realty Income has tried to take advantage of the weakness within the sector and acquire solid properties at a decent price. This strategy should pay off in the long term. As can be seen in the chart below, Realty Income believes that investing and consolidating the market will pay off eventually, and that is precisely what they have been doing in the last few years. A great example of the expansion strategy they have been using is partnering with Decathlon in Europe. Decathlon now accounts for 1% of the total annualized base rent, or ABR, for Realty Income. Furthermore, Realty Income is extremely well diversified with clients across a range of different industries. Last year, we wrote about the issues with Walgreens (WBA), which didn't really have a large impact on Realty Income, as we anticipated. In addition, you can see the largest sector allocation is just over 10%, which has plenty of businesses underneath it. This shows a well-diversified portfolio, just like an investment portfolio should be, anti-fragile. As you can see below, Realty Income has been able to increase its FFO per share rapidly since 2022. This shows the serious consolidation we have been talking about earlier in this article. Realty Income has set itself up for a great future once the macroeconomic environment becomes better. They have done the investments in times of weakness. There have been plenty of other articles on here that have discussed the valuation of Realty Income. It is pretty simple, Realty Income is cheap, with a P/FFO of just 16.38 and a P/AFFO which was recently close to 15-year lows. Realty Income is going to benefit from interest rate cuts and while it is unlikely that we will see aggressive cuts in an election year, I wouldn't be surprised if we start to see some rate cuts in 2025. Once rates come down, it is likely that people will flock to some more reliable passive income streams, which would cause sentiment in the sector to improve as well. Furthermore, a blue-chip REIT with occupancy rates of close to 99% is precisely what you like as for reliable dividend payments for many years to come. Yes, you probably heard of it before, using covered calls to generate additional income and create a compounding effect on steroids. In addition, you can add a cash-secured put component to it as well, if you like acquiring an additional 100 shares at a lower price and getting paid for it. While I won't go as in-depth as last time. You could increase your cash flow quite significantly by using this short strangle. For example, let's say you don't mind buying 100 shares of Realty income at the current share price of $55 on January 19th '25. Presently, selling this contract would give you $290 in total. Or $2.9 per share. Let's say on the other hand that you wouldn't mind letting go of 100 shares at $60, which would be over a 9% increase in 6 months, based on the current share price of $55. Selling that covered call would pay you $95 at the moment of writing. In total, this would mean an increase in cash flow of $385 per 100 shares for holding around half a year. This means that you could repeat this strategy twice per year. This would generate you $770 in additional income with no other changes to your position as long as the stock continues to trade between $55 and $60. You could see this as a $385 dividend you can receive immediately, which you can use right now. Of course, you can tweak this however you would like or only write cash-secured puts or covered calls. In total, this would give you a 14% annualized return or $7.7 per share each year based on a $55 cost basis per share. I understand that this strategy is not for everyone, and please review the risks of options before placing any trades. I just wanted to share with you that there are possibilities to increase your cash flow even further through options. On the other hand, you could also see the covered call component as a hedge. If you are afraid of a further decline in share price, the premium you collect from selling the covered call gives a nice buffer for the decline your shares experience. All things considered, I think Realty Income is an excellent investment for long-term investors looking for a nice monthly cash flow, while also having the potential of some nice stock price appreciation in the upcoming years and decades. Furthermore, Realty Income has set itself up greatly for a change in the economic environment. The company has really focused on rapid expansions while acquiring top-tier properties in times of hardship in the industry. Realty Income's long-term lease agreements provide investors with a guarantee that they will continue to get strong cash flow for years to come. In addition to the close to 99% occupancy rate and great expansion in Europe, as can be seen from the Decathlon case, the company has a bright future ahead of itself.

A 15-Stock Dividend Growth Retirement Portfolio For Stagflation

Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our subscriber-only portfolios. Learn More " Our base case outlook for the U.S. economy moving forward is that we will be experiencing stagflation for the foreseeable future, which is above-average inflation and below-average growth. In this article, we will explain why and then discuss some ideas for retirement dividend income in this environment. The reasons for stagflation are numerous, but they include massive deficit spending by the US Treasury, leading to large amounts of excess demand for goods and services that drive up prices. Meanwhile, much of that capital is being allocated inefficiently, and therefore failing to increase the actual productivity of the economy, which weakens growth while still increasing demand. Additionally, the Biden administration has been raising tariffs on imports, especially from China. If Trump were to be elected, tariffs would likely increase even more. This will also have an inflationary effect on prices. Growing geopolitical tensions around the world and an increase in the fragmentation of the global economy will also likely put upward pressure on prices. Goods and services will not flow as freely and cheaply between countries as they have in the past. In particular, the supply chain of critical minerals from countries like China, Russia, and Iran to the West could be threatened by these tensions. Furthermore, the growing reshoring of production by Western countries as they seek to decouple their economies from China is also likely to be inflationary in nature as production costs rise. Another driver of stagflation is that there are massive investments being made in artificial intelligence research and the infrastructure needed to power AI applications in the coming years. However, it will likely be some time before those investments result in true cost savings. Meanwhile, all this investment will likely be inflationary, without driving commensurate economic growth. Additionally, there are signs that the economy is weakening as consumer spending and confidence are falling, and employment has crossed the 4% threshold. The yield curve remains sharply inverted, and there are growing concerns that defaults will rise in the middle market sector, as recently shared by Ares Capital Corporation's (ARCC) CEO. As a result, we think setting up a portfolio in a manner that profits from a stagflationary environment is a prudent move at the moment. In the next section of this article, we will discuss a hypothetical portfolio for those targeting a high yield while positioning themselves to profit from stagflation. The first segment we would look at is infrastructure, particularly infrastructure with long-duration contracts and regulated assets that are either inflation-protected or have inflation-linked escalators. Some great blue-chip picks in this sector include Brookfield Infrastructure Partners (BIP, BIPC) and Brookfield Renewable Partners (BEP, BEPC). These both have the vast majority of their revenues indexed to inflation, and nearly all of their remaining revenues inflation-protected through regulated and/or highly contracted business models. They also have strong balance sheets with BBB+ credit ratings, attractive yields well over 5%, mid-to-high single-digit distribution growth rates, double-digit projected AFFO per unit growth rates for the foreseeable future, well-diversified quality asset portfolios, and strong management from their external manager, Brookfield (BN, BAM). Another space that we really like right now is energy. In particular, blue-chip energy midstream companies like Enterprise Products Partners (EPD) and Energy Transfer (ET). They boast strong business models, have high single-digit distribution yields that are well covered by cash flows, are projected to grow their distributions in line with or at a faster rate than inflation, and are highly contracted. This all makes them defensive in nature. They also have some inflation-linked escalators and protections in their contracts. However, they do issue K-1s, so investors who have issues with investing in a K-1 issuing security could look at alternatives such as Enbridge (ENB), which issues a 1099 (though it is a Canadian corporation). In addition to having a very attractive dividend yield and strong balance sheet, it is well-diversified across the midstream space and is increasingly moving into regulated utilities, making a nice blend of inflation-linked contracts and inflation-protected regulated assets. Another energy stock that we like is Exxon Mobil (XOM). While it is not a midstream pick, it has a stellar balance sheet and well-diversified assets that should thrive in an inflationary environment, though it may suffer a bit from a weak economic environment. It also offers an attractive dividend yield of 3.4% and a free cash flow yield of 8.7%, while trading at a price-earnings ratio of 12.58, well below its 10-year average of 14.69 times. Another sector that can be good in a stagflation environment is the REIT sector (VNQ). We particularly like W. P. Carey (WPC), which generates the majority of its rents from CPI-linked leases. It has a very defensive business model with a portfolio primarily of industrial warehouse real estate, along with some quality retail and self-storage properties. Its long-term triple net leases and BBB+ credit rating make it very defensive in nature. Another REIT I like right now is Mid-America Apartment Communities (MAA) because it combines a discounted valuation with a solid 4.2% dividend yield, an attractive long-term growth track record and outlook, and a strong balance sheet. Its exposure to some Class B properties gives it a bit of a defensive nature, while its multifamily real estate business model helps it to benefit from inflation. The short-term leases with its tenants mean that it can hike rents fairly regularly to capture increased value due to inflation. Another sector that is good to have some exposure to is precious metals. We think Newmont Corporation (NEM) is a good pick for benefiting from a stagflation environment. This is because it is currently implementing significant synergy-capturing initiatives that should help keep costs under control, even if inflation remains elevated. Meanwhile, a weaker economy and higher-for-longer inflation should benefit the price of gold over time, especially given the numerous tailwinds facing the precious metal that we recently discussed. As a result, I think Newmont might be a solid pick. It also generates a dividend well above the S&P 500's average, adding nice diversification to our retirement portfolio, while also trading at a much cheaper valuation than peers like Agnico Eagle Mines (AEM). Another sector to consider is telecommunications. While we do not generally favor telecommunications stocks, and in particular we do not think it is prudent to invest in serial underperformers like AT&T (T), Verizon (VZ) could be a decent pick for retirees interested in income. This is simply because it has a very attractive dividend yield of 6.5%, has proven to grow its dividend consistently over time, has an investment-grade balance sheet, and has a solid competitive positioning in the industry. It generates stable cash flows regardless of macroeconomic conditions and should be able to withstand fairly high inflation due to its scale and ability to unlock efficiencies to fight costs. Finally, we come to the consumer products sector, as some companies in this sector are particularly well-positioned for stagflation. For example, Walmart (WMT), with its massive scale and dominant moat in retail, enables it to have significant pricing power with suppliers. Its low price point should hold up very well during a recession or weak economic environment, thereby protecting its margins and performing well in a stagflation environment relative to many other companies. Some other consumer products companies such as Johnson & Johnson (JNJ), Procter & Gamble (PG), Coca-Cola (KO), and Altria (MO) all enjoy substantial brand power, scale, and sticky customer loyalty. These qualities enable them to pass on increased costs to customers without suffering much, if any, decline in demand due to rising prices. Their economies of scale also enable them to unlock efficiencies to fight inflation costs. So there you have it, a 15-stock 5%-yielding portfolio that provides well-diversified exposure to attractive, passive income-generating machines. These should hold up quite well, if not outperform meaningfully, during a stagflationary environment. Keep in mind that the focus of this portfolio is generating attractive and stable income, not necessarily chasing maximized total returns. So, not every pick in this portfolio is one that we would buy given that total returns are our top priority. Hopefully, however, this article is useful for people in or near retirement who are looking to generate attractive passive income from their investments while also protecting themselves against the perilous economic environment we find ourselves in.