Love Jim or hate Jim, he’s a heavyweight on Wall Street. Many people rely on him for their next investment decision, and many of his picks do pan out well in the long run. The kind of stock we will be talking about today is a good pick regardless of what a certain investment Guru may think about it: Realty Income (NYSE:O | O Price Prediction). There may be some people who are still nervous about investing in real estate investment trusts (REITs), but the consensus is that this is one of the safest stocks you can invest in today.
Realty Income is also known as “The Monthly Dividend Company,” because it distributes its dividend payouts monthly. Cramer has consistently held a positive view of Realty Income due to its monthly dividend payments. O stock has underperformed in recent months, but Cramer maintains his endorsement.
He pointed out that investors get monthly dividend checks when they buy the stock. He also said that O stock was too cheap when it dropped into the low $50s. It has bounced back since then, but if you’re a strong believer in Cramer, a floor in the low $50s does make O stock one of the safest, if not the safest income stock. It trades at just above $57 as of writing. Let’s take a deeper look here.
Key Points in This Article:
- Realty Income pays a 5.6% annualized monthly dividend yield, which is attractive even in this environment.
- The underlying business is resilient and widely considered to be one of the most quality REIT cash machines.
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The Real Estate Industry Remains Solid
The broader real estate market has been far more resilient than previously expected. It survived COVID and then the subsequent steep interest rate hikes that many were sure would’ve created a crisis like the one in 2008. This has not happened, and the industry seems to have learned from its mistakes.
As such, discounting O stock now does not seem too rational. The stock is mainly sitting at a dip due to investors still fearing anything tied to the real estate industry. Plus, interest rates remain high. Many investors are not willing to dip their toes into equities just yet and are holding Treasuries tight. Some of them are yielding nearly 5% at the moment, so it’s hard to resist such a “risk-free” yield.
But if you do want a stock that will compound much more efficiently and outperform Treasuries, O stock is a good pick.
Why Realty Income Is a Safe Income Stock
Realty Income is far safer than your typical REIT. This company’s tenant base is mostly companies that operate in the retail industry, and these tenants themselves sell non-discretionary products. Their cash flows don’t wobble much, especially not enough to delay high-priority payments like rent. This stability then translates over to Realty Income, which has been a linchpin of the broader commercial real estate industry.
Cramer isn’t the only one making the argument that Realty Income is a safe income stock. The company has maintained occupancy rates in the high 90s through recessions. Currently, the occupancy rate is at 98.5%. Realty Income expects its occupancy rate to remain above 98% going forward.
Even with historically high interest rates, Realty Income has managed to comfortably service the debt and pay dividends. This is because most of the debt is fixed-rate, not floating-rate. Out of $29.8 billion in total liabilities, $27.4 billion are considered long-term. Out of that, $25.1 billion is fixed-rate debt. The company managed to post a net income of $249.8 million despite a $270.3 million net interest loss.
Positive Catalysts Are on the Horizon
Speaking of interest rates, the Federal Reserve is expected to start cutting in September. Investors are pricing in two rate cuts for the year, and these rate cuts would bring immediate relief to the real estate market.
If interest rates are held lower sustainably, the debt servicing costs are likely to tumble. The indirect effects of a lower interest rate are even better for Realty Income. Its tenants would find themselves in a better position, thereby giving Realty Income more pricing power. It would also be easier to expand its real estate portfolio.
The expansion is already happening beyond traditional U.S. retail. The company’s European expansion targets the massive $8.5 trillion European real estate market. Data centers and digital infrastructure are also quickly gaining strength. Investments in data centers have reached $300 million, whereas E.U.-related investments are at $2 billion. If you take the U.K. into account, it jumps to $11.6 billion.
The company now targets $4 billion in investments this year after generating a 7.4% yield on $3.9 billion of investments last year. In Q1 alone, the company invested $1.4 billion at an initial weighted average cash yield of 7.5%.
Dividends Plus Upside Potential
Once interest rates come down, its monthly dividends at a 5.6% annualized yield will look a lot more attractive. Investors will have no choice but to buy into dividend stocks as Treasuries start yielding less.
O stock is set to be one of the biggest beneficiaries. It is one of the first companies that comes to mind when thinking of a high-yield income stock. Lower interest rates could push it well above $70.
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