By admin 
It’s hard to find high dividend yields you can rely on. Keep in mind that a stock’s dividend yield is the ratio of the company’s declared payout to its share price. So a high return can be a signal that a stock is risky if the market does not support a higher share price. But that is not always the case. Real estate income (NYSE:O) is a good example.
This is known by design real estate investment trust (REIT) (and any other REIT) pays out most of its income to shareholders. That said, the stock is struggling. The shares are trading near their 52-week low, putting the yield at 6%.
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But sometimes a stock’s struggles are due more to external factors than its underlying business. Today I think that is the case. I’ll highlight what could drag Realty Income stock down and why this is potentially one of the best dividend stock opportunities heading into 2025.
Interest rate problems keep real estate income low
Realty Income and other REITs are companies that acquire and lease real estate. Realty Income specializes in renting out retail properties with one tenant through net leases. The core tenant base consists of recession-resistant businesses, such as convenience stores, supermarkets, dollar stores, pharmacies and restaurants. A REIT does not pay corporate tax because it distributes at least 90% of its income to shareholders. That’s why REITs generally make excellent dividend stocks.
REIT stocks are sensitive to the economy’s interest rates for a number of reasons.
First, because REITs do not retain profits, they issue shares and borrow money to finance growth (for example, purchasing real estate). Higher interest rates make borrowing more expensive (bad for business), while lower interest rates make debt cheaper (good for business). Second, dividend stocks are less attractive to investors when safer, higher-yield alternatives are available. For example, many income-oriented investors might choose a high-yield savings account over a dividend stock if the returns are similar because it is safer.
You may have seen the headlines about the Federal Reserve cutting back on the economy reference rate. This affects the way banks borrow from each other. The 10 year old US Treasury The yield (interest rate) is the benchmark for corporate bonds, and it continues to rise. You can see the inverse relationship between the 10-year yield and Realty Income’s stock price:
O chart
O data Ygraphs
Market forces determine how government bonds behave, and rising yields can be due to a variety of things, such as inflation concerns or political factors. The bottom line is that Realty Income stock will struggle until 10-year Treasury yields stop rising.
Yes, you can rely on the dividend. Here’s why.
The crucial takeaway today is that external factors only affect Realty Income’s business to a certain extent. Higher interest rates may hinder Realty Income’s growth by making debt more expensive, but it doesn’t change the big picture of how good a company Realty Income is.
Realty Income is a world-class dividend stock and is poised to remain so. The company has raised its dividend for 31 years in a row, a streak that has survived the dot-com crash of 2000-2001, the Great Recession of 2008-2009 and the COVID-19 pandemic. Today, the dividend is financially solid.
Analysts estimate Realty Income in 2024 resources from operations (FFO) will be $4.20 per share, which translates into a comfortable price dividend payout ratio of 75%. In other words, the company’s cash profits from operating its business would have to fall by more than 25% to highlight Realty Income’s ability to organically fund its dividend.
The company operates a diverse real estate portfolio that focuses on tenants who operate recession-resistant businesses, which means there is a low chance of rent going unpaid. In addition, Realty Income has an A rating of S&P Globalwhich is a strong credit rating for a REIT. It helps bridge the financial gap during crises such as the 2020 pandemic.
Real estate income is a bona fide bargain for 2025
Again, Realty Income’s share price problems do not reflect the company. Through nine months of 2024, the company earned FFO per share of $3.14, compared to $2.99 a year ago. Moreover, analysts estimate that long-term real estate income will grow by an average of 6% per year.
That’s what makes the diagram below so exciting. The stock trades at just under 13 times cash flow from operations (chart replacement for FFO), a huge discount to the average over the past decade. Investors get a reliable dividend yield of 6%, with a further estimated growth of 6%, giving a potential total annualized return of 12% without any change in the stock’s valuation.
O Chart price to CFO per share (TTM).
O CFO price per share (TTM) data Ygraphs
I consider the current valuation to be sufficient safety margin in case interest rates on government bonds remain higher for longer. If rates eventually fall, the potential increase in valuation could deliver market-beating total returns for long-term investors. Additionally, investors can reinvest Realty Income’s dividend to maximize compounding.
Realty Income is a top dividend stock with enough upside at this price to interest all investors, not just high-yield seekers. That makes it an attractive purchase to start the new year.
Should you invest €1,000 in real estate income now?
Consider the following before purchasing shares in Realty Income:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds and recommends Realty Income and S&P Global. The Motley Fool has one disclosure policy.