Could Realty Income Potentially Make Millionaires Through Investment?
Title: Investing in Realty Income: A Decade of Growth and Dividends
Realty Income, (O 0.07%), has been a reliable income generator for long-term investors, boasting a robust track record as one of the world's largest real estate investment trusts (REITs). Known for dishing out monthly dividends, it's also raised its payout 128 times since its 1994 IPO, offering a forward yield of 6%, significantly surpassing the 10-year Treasury's current yield of 4.8%.
But is Realty Income poised to deliver millionaire-making gains within the next decade? To answer this question, we'll delve into its business model and historical performance.
Diving into Realty Income's Business
As a retail REIT, Realty Income purchases a multitude of commercial properties, leases them out, and shares the rental income with its investors. The REIT model requires distributing 90% of pre-tax profits to investors as dividends to maintain a beneficial tax status.
By the end of 2024's third quarter, Realty Income had 15,457 properties—an increase from the 13,458 properties held at the beginning of 2023. The acquisition of Spirit Realty in January 2024 played a significant role in this growth. Realty Income focuses on leasing its properties to recession-resistant retailers, securing tenants like Dollar General (accounting for 3.3% of its annualized contracted rent in the third quarter), Walgreens (3.3%), Dollar Tree (3.1%), and 7-Eleven (2.5%).
Assessing Realty Income's Growth
Despite challenges faced by some of its major tenants, such as Walgreens and Dollar Tree, Realty Income has managed to maintain a high occupancy rate, never dipping below 96% since its public debut. This resilience was evident in its impressive 98.7% occupancy rate for the first nine months of 2024.
REITs typically assess their profit growth using adjusted funds from operations (AFFO) per share instead of earnings per share (EPS). From 2013 to 2023, Realty Income posted a 5% compound annual growth rate (CAGR) in annual AFFO per share, overcoming market challenges like the pandemic and geopolitical conflicts.
For 2024, Realty Income anticipates an AFFO of $4.17 to $4.21 per share, surpassing its forward annual dividend rate of $3.17 per share. With this healthy growth expectation, investors can expect solid returns.
During the past two decades, Realty Income's stock has experienced a tremendous rally of 173%. Including the impact of its reinvested dividends, this growth translates into a staggering total return of 732%. Although not astronomical, this performance exceeds the S&P 500's 680% total return during the same period.
Millionaire-Making Gains: A Dream or Reality?
Despite Realty Income's promising growth, it's essential to approach expectations with a level head. Currently trading at 13 times its expected 2024 AFFO, the stock offers an attractive value, considering elevated interest rates can put a damper on both REITs' purchasing abilities and tenant performances.
However, as interest rates decline, the 20-times AFFO valuation Realty Income commanded at the end of 2021 serves as a reminder of its potential for a higher valuation in the future.
Assuming Realty Income can maintain its 5% CAGR in AFFO growth from 2024 to 2034, trading at a more optimistic 20 times its AFFO in the final year, the stock could potentially rally around 157% to $136 over the next decade. It would also likely continue increasing its dividends, keeping its dividend yield around its historical 5% level.
This growth would represent an excellent return for income-oriented investors, although it wouldn't create a millionaire from a $10,000 investment. While Realty Income is a sound long-term investment, it's not a millionaire-maker stock.
[1]Source: YCharts[2]Source: Fidelity[3]Source: Wall Street Journal[4]Source: MarketWatch
- With a focus on investing wisely, many financially savvy individuals are considering Realty Income as a potential opportunity for their portfolios, given its track record of distribution increases and robust dividends.
- For those interested in wealth accumulation through finance and intelligent investing, Realty Income's continued growth could potentially offer solid returns over the next decade, but it may not be classified as a millionaire-making stock.
