Realty Income: A Reliable REIT in Turbulent Times?

Realty Income is often regarded as a reliable dividend stock for long-term investors. As one of the world's largest Real Estate Investment Trusts (REITs), the company impresses with monthly dividend payments that have been increased 127 times since its IPO in 1994. Over the past three decades, Realty Income achieved a total return of an impressive 4,960% with reinvested dividends, outperforming the overall market S&P 500, which had a return of 2,030%. But the crucial question is: Should one hold, buy, or sell this REIT stock as the year 2025 approaches? The focus of retail REITs such as Realty Income is on acquiring commercial properties, leasing them, and distributing the majority of rental income to investors in the form of dividends. To ensure a favorable tax rate, US REITs must distribute at least 90% of their taxable income. A comprehensive analysis of a REIT includes reviewing the growth of the total number of properties, occupancy rates, as well as adjusted funds from operations per share. At Realty Income, all these metrics show a steady increase. Additionally, Realty Income merged with the smaller competitor Spirit Realty Capital in January 2024, adding 2,037 properties to the portfolio. Despite the solid business situation, the company faces criticism because interest rates remain high and some of the top tenants are struggling. The US Federal Reserve lowered the key interest rate in September for the first time in four years but could slow its course if inflation is not curbed. High interest rates have a twofold effect: they make the acquisition of new properties more expensive and make risk-free investments such as certificates of deposit and government bonds more attractive than REITs. Another issue involves two of Realty Income's largest tenants – Walgreens and Dollar Tree – who are facing difficulties. Walgreens plans to close 1,200 stores over the next three years, affecting 3.3% of Realty Income's annual rental income. Dollar Tree, which accounts for 3.1% of rental income, will also close about 1,000 stores. Even some smaller tenants like CVS, AMC, and Red Lobster are closing many of their physical locations.