One of the market’s more popular real estate investment trusts — or REITs — is Realty Income (NYSE: O). The well-diversified REIT has a portfolio of 15,450 commercial properties across 90 different industries, with a long track record of shelling out rising, monthly distributions.
Realty Income is coming off a bad year. The shares declined in 2024, even if you adjust for its generous dividend. Will it bounce back this year?
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Let’s take a look at the reasons investors may want to buy, sell, or hold Realty Income in 2025.
Consistency makes Realty Income a steady workhorse for income investors. It’s not just that it’s one of a handful of companies cutting monthly dividend checks, or in Realty Income’s case, a long string of 655 consecutive monthly distributions. The REIT has also managed to grow its disbursements. Realty Income has managed to hike its payout during each of the past 109 quarters.
Offering its tenants long-term, net lease agreements frees Realty Income of the ups and downs of ownership. Businesses sign triple net leases — typically for at least 10 years — that leave them paying more than just rent. The tenants cover property taxes, insurance, maintenance, and other operating expenses.
It’s not the only way that Realty Income operates in a conservative fashion. The top three industries it operates in are supermarkets, convenience stores, and dollar stores — businesses that typically hold up well in all economic climates.
Realty Income’s track record is impressive. Its compound total annual return since going public in 1994 currently tops 14%, better than the S&P 500‘s (SNPINDEX: ^GSPC) return of just shy of 11% in that time. Yes, you can beat the market and still walk away with a chunky dividend that currently yields 5.8%.
Image source: Getty Images.
Buying an iconic REIT following a down year in which the shares declined 7% (or 2% on a dividend-adjusted basis) might seem opportunistic, given its long-term track record of market outperformance. Unfortunately, analysts who follow the company aren’t hearing the same dinner bell. At least four Wall Street pros have slashed their price targets on Realty Income this month alone.
The consensus among the analysts seems to be that 2025 could be a challenging operating and interest rate environment for Realty Income. It’s important to remember that while shifting the expense burden of triple net leases to its tenants makes it easier on Realty Income, it does make it that more unpredictable for the businesses. Realty Income currently has an impressive 98.7% portfolio occupancy rate, but that can change quickly if the economy stumbles or operating costs spiral out of control.
Slow and steady is the name of the game at Realty Income. Adjusted funds from operation rose a mere 6% in its latest quarter. At the end of the third quarter, Realty Income was targeting a 5% increase in adjusted funds from operations in 2025.
Investors will receive a lot more clarity next month when the REIT announces its fourth-quarter results. Will it stick to its earlier guidance, or does it see some of the same warning signs that led to a couple of analysts lowering their projections earlier this month?
The dividend streak is impressive, but the hikes have been typically fractional pennies. Despite four quarterly increases over the past year, the payout is just 2.9% higher than it was a year ago.
Stability naturally isn’t a bad thing. Realty Income estimates that about 90% of its collected rent is generated from business that are either recession resistant or free of e-commerce disruption. Despite the wild swings of interest rates and operating climates over time, Realty Income has been able to come through with bottom-line growth in 27 of the past 28 years.
So is Realty Income a buy, sell, or hold? I’m going with the bulls here. The declining stock over the past year has boosted Realty Income’s yield to 5.8%. Yields of the leading money market funds that were roughly even with the REIT a year ago are much lower now. Next month’s financial update will be critical in assessing the challenges starting to percolate in 2025, but it’s hard to bet against a track record of nearly three years of stability.
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Rick Munarriz has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
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