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Real estate has been a tough sector to navigate since the onset of the pandemic, which caused both consumers and workers to change their habits. But it could also represent an opportunity.

One company to consider now is Realty Income (NYSE: O). Formed more than half a century ago, this real estate investment trust (REIT) is required to pay 90% of its annual taxable income as dividends. It owns various properties with an emphasis on retail — which might give some investors pause. But it’s important to understand the properties it owns to see how dividends are likely to fare.

So how does Realty Income stack up? Let’s take a deeper dive to see if you should buy, hold, or sell the shares.

Image source: Getty Images.

Occupancy and rents

Realty Income gets the overwhelming majority of its rent from the retail sector. In fact, nearly 82% of last year’s contracted payments came from that sector. That may concern some investors given the challenges some retailers face with online shopping. In the second quarter, e-commerce sales represented 15.4% of total retail sales, adjusted for seasonality.

But Realty Income mitigates this risk. First, it seeks out retail tenants that have been resilient to online shopping or have a strong omnichannel presence that utilizes physical stores. Second, it has strong, well-known tenants. These include grocery stores, convenience stores, dollar stores, quick-service and casual-dining restaurants, and home improvement stores.

The tenant list includes well-established companies such as Dollar General, Walgreens Boots Alliance, Walmart, and Home Depot.

And if you want proof that it’s working, Realty Income has been able to maintain high occupancy rates and push through rent increases. At the end of the second quarter, it had a 99% occupancy rate, the same level as three months ago. On renewed leases, it was able to get a 3.4% increase in rents during the period. Realty Income has also been buying and developing properties. In the first half of 2023, it spent $4.2 billion to add 778 properties.

Monthly payouts

High occupancy and increased rents make for higher cash flow. A key metric when analyzing REITS is adjusted funds from operations (AFFO), serving as a proxy for cash available for distribution. In the second quarter, Realty Income’s AFFO was $1 a share, up 3.1% from a year ago. This easily covered the $0.765 dividend payments during the quarter.

Realty Income pays dividends monthly. Better still, it has raised its payments, typically several times during the year, for more than a quarter of a century. The board of directors increased July’s payout from $0.255 to $0.2555. That’s made it 103 straight quarters with a raise.

Realty Income’s stock has a 5.6% dividend yield, dwarfing the S&P 500‘s 1.5%.

A solid and growing portfolio of properties, a history of higher (and frequent) dividends, and the cash flow to support them all add up to a buying opportunity for Realty Income’s shares.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Walmart. The Motley Fool recommends Realty Income. The Motley Fool has a disclosure policy.

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