We’ve had quite a historic month. A gunman nearly assassinated a former president while the current commander-in-chief stunningly revealed he wouldn’t seek reelection.
Those two events add to the country’s growing economic uncertainty, already being driven by persistently high inflation and interest rates. They also add to the rising fears that the stock market could crash (it had its worst day in years earlier this week).
I don’t have a clue whether there will be a crash. However, I have taken steps to prepare if it does. I have cash on the sidelines and several defensive stocks in my portfolio to cushion the blow, like Realty Income (NYSE: O). Here’s why I think it’s a great investment during uncertain times.
A solid base return
Realty Income lives up to its name. The real estate investment trust (REIT) pays a very durable dividend. It recently declared its 649th consecutive monthly dividend.
The company has raised that payout 126 times since going public in 1994 (30 straight years), including for the past 107 consecutive quarters. It has grown its dividend at a 4.3% compound annual rate during that period.
The REIT’s dividend currently yields 5.5%, several times higher than the S&P 500’s 1.3%. That high payout provides investors with a very solid base return.
The dividend is on a very sound foundation. The company generates very stable cash flow backed by long-term net leases. Meanwhile, it has a conservative dividend payout ratio for a REIT: less than 75% of its adjusted funds from operations (FFO).
To top it all off, it’s one of only eight REITs in the S&P 500 with two investment-grade bond ratings of A3/A- or better. The company’s fortresslike financial position helps protect it during market downturns.
Lower volatility
Realty Income’s combination of stable earnings and a rock-solid dividend make it among the least volatile stocks in the S&P 500:
Its beta is 0.5, implying it’s half as volatile as the broader market. It also has an excellent record of growing during more-challenging economies. Realty Income has delivered positive earnings growth in 27 of the last 28 years (the only outlier was during the financial crisis). It was one of only a handful of REITs that delivered positive earnings and dividend growth during the 2020 pandemic period.
The company is in a strong position to continue delivering during the next downturn. About 90% of its rent comes from tenants in industries resilient to a recession or isolated from the pressure of e-commerce, like grocery stores, convenience stores, and dollar stores.
Visible growth
The REIT should have no trouble continuing to grow during the next market crash. Embedded rent drivers like rent escalators, along with acquisitions it can internally fund with retained cash after paying dividends should add about 2% to its FFO per share each year.
Meanwhile, it has ample balance-sheet capacity to externally fund acquisitions. It estimates that every $1 billion of externally funded investments will add about 0.5% to its FFO per share each year. It conservatively expects to grow its FFO per share by 4% to 5% per year when adding its internal and external drivers.
Realty Income has already locked in a solid base growth rate this year. It closed its accretive $9.3 billion acquisition of Spirit Realty earlier this year, and that deal alone should add more than 2.5% to its FFO per share in 2024. Add that to rent growth and its line-of-sight on completing $3 billion of additional acquisitions this year, and the REIT is on track to grow its FFO per share by more than 4% despite interest rate headwinds.
A portfolio stabilizer
Realty Income’s stock isn’t immune to market crashes, but its lower volatility suggests it won’t decline as sharply as the broader market during a crash. Meanwhile, it provides an attractive base return from dividend income that should continue rising.
These factors should enable it to provide stability during a future market storm, which is why I hold a growing position in this high-yielding REIT in my portfolio.
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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Is the Stock Market Going to Crash? Who Knows? That’s Why I Own This High-Yield Dividend Stock. was originally published by The Motley Fool
