Considering the promise for further interest rate cuts, an improved corporate tax rate structure, and the potential for economic growth, it is a little surprising real estate investment trust (REIT) Realty Income (NYSE:O) stock is down 2% since Donald Trump was elected president.

Those are all the elements REITs like Realty Income should benefit from, but O stock continues its fall from recent highs. What is holding this retail REIT back and can it double over the next four years? 

24/7 Wall St. Insights:

• Realty Income (O) and other REITs were hurt by the high interest rate environment and should benefit from rates cuts and various policies of the incoming Trump administration.
• O stock, however, has continued to fall after the election, turning on its head how shares should be responding to various positive indicators.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks“ now.

A long history of rewarding shareholders

Realty Income has been a solid dividend stock to own for income investors since its inception. It has generated total returns of more than 5,000% over the past three decades compared to 2,100% returns for the S&P 500.

The REIT offers an attractive dividend yield of 5.4% and has the benefit of rewarding shareholders with a monthly payout. Realty Income is the one that pioneered the monthly dividend payment and even bills itself as The Monthly Dividend Company. It also raises its dividend every quarter and has increased the payout for well over 100 consecutive quarters.

Over the past two years, though, the Federal Reserve’s higher-for-longer interest rate policies have weighed heavily on the REIT industry. That’s because they typically borrow money to invest in new properties and the historically high rates raised their borrowing costs.

The yields on REITs also become less attractive. Although REITs like O usually sport high yields, high interest rates make other less risky investment more attractive, lowering demand for REIT stocks.

Going against the rising tide

Yet according to data from Janus Henderson Investors, even though REITs saw their stocks witness dramatic devaluations during the rate runup by the Fed — Realty Income lost more than a third of its value — earnings actually grew 18% over that same time frame.

Talk of rate cuts this past summer allowed O stock to finally begin to gain ground once again and it was doing well right up until the Fed began cutting rates. That stands logic on its head and both Trump’s election and the Fed cutting rates again by another quarter point should have been catalysts for gains, not further declines.

The market, though, seems more worried about Realty Income’s tenants than macroeconomic policy, and has been bidding shares lower.

Worries about Realty Income tenants

Realty Income’s biggest tenants are deep discount retailers Dollar General (NYSE:DG)  and Dollar Tree (NASDAQ:DLTR) and Walgreens Boots Alliance (NASDAQ:WBA) pharmacies. The trio account for nearly 10% of the REIT’s tenants.

The dollar stores have been hard-pressed to grow in this sluggish economy — Dollar Tree plans to close 1,000 stores — and Walgreens has been spiraling lower for years, causing it to slash its dividend in half earlier this year. It announced recently it also would be closing a number of its U.S. stores.

Yet ratings agencies Standard & Poor’s and Moody’s (NYSE:MCO) both give Realty Income top credit ratings, indicating they are not concerned about the REIT’s tenants. Moreover, O has nearly 99% occupancy rates. Its business is not at risk.

Further, Realty Income operates on a triple net lease basis, meaning tenants are responsible for maintenance, insurance, and taxes in addition to rent, allowing the REIT to focus on property management.

Which is why the REIT continues to grow its profits and can generously raise its dividend for investors.

Tailwinds should reverse O stock’s current course

In short, Realty Income is offering investors a very attractive valuation on its stock, its financial foundation remains solid, and there a numerous macroeconomic tailwinds behind it that will allow for significant share price appreciation in the coming years.

Coupled with a generous dividend policy that rewards shareholders, particularly those with a long-term buy-and-hold mindset, and O stock looks poised to double in value during Trump’s presidency.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.