Why this stock is safe in a market correction
Nothing goes up or down in a straight line. This includes stock markets and economies, which investors should remember. This is because when looking to buy a stock, make sure the company backing it has what it takes to weather the adversity that will eventually befall it at some point.
Real estate income (O 0.75% ) proved that a correction will be no more than a short-term negative effect on the long term. Here are three reasons why you should see this real estate investment trust (REIT) as a safe haven in the event of a potential storm.
1. A simple and powerful model
Real estate income is called a net rental REIT. This means that it owns single-tenant properties where tenants are responsible for most of the asset-level operating costs. Any property is high risk, given that there is only one tenant. However, in a large enough portfolio, the risk is quite low, since Realty Income does not face significant operating costs. The REIT, for reference, is among the largest in the net rental space, with over 11,000 properties.
There’s more to this story, however. The majority of Realty Income’s portfolio is retail (about 77% of rents), where properties are fairly generic and relatively easy to vacate or sell. About 17% of rents come from non-retail assets, which are mainly warehouses and industrial properties. And the rest (6% of rents) is classified as other, which is a mix of casino and vineyards. On top of that, Realty Income is increasingly investing in Europe, where it now has $4.3 billion in assets. While Realty Income isn’t the most diversified net rental REIT you can own, it has become more and more diversified in recent years. Diversification is good for your portfolio and it’s also good for REIT portfolios.
As long as Realty Income continues its momentum, there is little reason to believe that a downturn in the market or the economy will derail it.
2. The dividend
This last statement is supported by the fact that Realty Income has increased its dividend every year for 27 consecutive years. This makes it a dividend aristocrat, part of a very selective group of companies. But think back to the past 27 years. It’s a period that included the tech crash of 2000, the recession and bear market of 2007-2009, and the pandemic, stock market crash and recession of 2020. Realty Income navigated through each. That’s not to say its stock price hasn’t fluctuated with the market and the economy, but its real business has never faltered. It is what allows a company to survive difficult times.
3. Capital advantage
The market, meanwhile, is well aware of the above factors. These are basically the reasons why Realty Income is considered an indicator in the REIT industry. But the general appreciation of the company’s strong position in the industry has more positives than you might think. Bond rating agencies (and bond investors) know how well-managed Realty Income is and have given it an investment grade credit rating. This means Realty Income can get relatively cheap capital from lenders.
The stock markets also know that the REIT is well managed, so it usually enjoys a premium price compared to its peers. In fact, the current dividend yield of 4.2% is near the bottom of Realty Income’s historical yield range. However, this means that it also has access to relatively cheap equity. Access to low-cost debt and equity capital gives the REIT a significant advantage when it comes to purchasing new assets.
This is an advantage that could become even more pronounced during a downturn. Indeed, companies owning real estate may prefer to enter into sale-leaseback agreements when other forms of capital become increasingly expensive. Realty Income has been and will continue to be ready to help them.
Nothing is perfect, but…
Realty Income has flaws, such as its large exposure to commercial properties. That said, the pros here will likely outweigh the cons for most long-term investors. And this will manifest itself most acutely when times get tough in the market and the economy. That’s why the conservative types will probably want to jump on board now, so they can focus on collecting the monthly dividend paid out by the REIT – it will make the next difficult period much easier. And you might even get the added bonus of Realty Income by investing in the downturn so that an even better business comes out of it.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.