Recent Buy

buyBoy, wouldn’t you know it. I go talking about sitting on cash and Mr. Market does me a favor. The Dow Jones Industrial Average fell by over 200 points today, for a 1.36% drop. Not much in itself, but there were a few companies that dipped even more than that and many of these companies have been weak even before the broader market turned south. I’ve been tracking a few companies that I thought would fit well in my Freedom Fund, but I had to wait for the right price. Today, I think I found a reasonable price for shares in one of these companies and so I decided to pull the trigger. I guess I get to stay true to my ‘monthly stock purchase’ mantra after all!

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 40 shares of Realty Income Corp. (O) on 5/31/13 for $45.53 per share.

There’s a few reasons I really like this company. First, they call themselves the “monthly dividend company” because of their long track record of paying dividends monthly (going back to when they first went public in 1994, or 514 consecutive monthly payouts). Gotta love a company that takes their dividend seriously like that! Second, it offers me diversification into real estate, as Realty Income Corp is an equity REIT (Real Estate Investment Trust) that primarily invests in real estate and earns an income through the rent they charge their tenants. This is my first REIT holding. I have been hesitant to invest in the sector since it’s been on a tear over the last couple years, but O has come down quite a bit lately. Over the last 5 trading days alone O is down over 10%. That kind of under-performance gets my attention.

Realty Income is a Triple Net REIT, meaning the lessee is responsible for the costs related to the care and maintenance of the building, the rent fee itself as well as any net real estate taxes on the structure. So, this puts Realty Income in a very nice position, in my opinion.

O is very diversified, not only in terms of tenants but also geographically. They have properties in 49 states, and have a total of 3,525 properties. Some of the tenants that are among the top 15 in terms of total portfolio revenue include high quality companies like Fed-Ex, Walgreen’s, Family Dollar, and CVS Pharmacy.

One big reason I purchased shares in this REIT is because of the high entry yield it offers. At the current monthly dividend payout of $0.1812292, O offered me a yield on my cost of 4.78%. This entry yield is backed by 19 years of dividend growth. Although the dividend growth has not been fantastic, it has been extremely consistent over the last 19 years and they raised the dividend by over 19% earlier this year.

Taking a look at the valuation, shares in O appear fairly valued here. Using a Dividend Discount Model with a 10% discount rate and a long-term dividend growth rate of 5%, I get a Fair Value on shares at $45.68. Obviously very close to what I actually paid. Not a steal to be sure, but I think this purchase offers me further diversification in my portfolio, a fairly high yield and access to monthly dividend payouts. O is trading for a P/AFFO (Adjusted Funds From Operations) of about 19 here. Again, not a steal but the recent drop of more than 10% in shares perked my attention.

This purchase adds $87.00 to my annual dividend total based on the current payout. Overall, I’m happy with putting a little capital to work in a high quality REIT like O.

I currently have 33 positions in my portfolio now, as this was a new addition.

Some current analyst opinion on my recent purchase:

*Morningstar rates O as a 3/5 star valuation with a FV estimate of $43.00.

I’ll update my Freedom Fund in early June to reflect my recent addition.

Full Disclosure: Long O

What are you buying?

Thanks for reading.

Special note: I’m in the midst of fighting a nasty case of gastroenteritis. So if there are any glaring errors with the article, please point them out. I’m not myself right now.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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58 Comments

  1. DM welcome to the wonderful world of real-estate investing! It will be important to monitor the interest rates when it comes to REITs, once rates rise our REITs will take a hit (some more than others depending on their spreads), and that is when we could get more bargains i.m.o. =)

  2. Many are already taking a hit. As soon as Bernankie hinted that they could taper QE the REIT’s seemed to take a hit. I’m probably going to be selling one of my RIET’s , mainly because they have cut their dividend twice recently but it won’t be O that I sell. I really like O and I plan to hold it for a long time.

    Good job grabbing up some stock on sale today! I can imagine you about 1/2 way through the trading day thinking that you wouldn’t be making any trade, then BOOM the market corrects in the last couple hours. Nice purchase.

  3. The REITs actually look to be in crash mode here. My mouth is watering, and O is very high on my REIT wish list. Preferred shares of REITs are also getting some very high yields here.

  4. There is a fellow blogger that has a good video on REITs and one on O. The website is http://www.pullingourselvesup.blogspot.com. If you go to the labels section, click on REIT and O.

    Note: This guy has owed O before blogging also. He ran a model portfolio for the blog using his own money. One of the stocks was O. He rebooted his portfolio recently on the blog and now runs demo accounts and O was expensive at the time of the switch. O is one of his favorite companies.

  5. Congratulations on acquiring O, it is a very fine company indeed. I have been following O for years now and wished I bought a while back when it was trading for less than $35. Depending on the valuation metric that you use (such as funds from operations), it may actually appear to be overvalued. I think I’ll wait until it slides a bit more before I pull the trigger myself, maybe when it reaches $40. Meanwhile, I’ve been picking up shares of DLR, XOM, and CVX.

    Your patience has paid off, and that’s what counts!

  6. I knew you would pull through DM and make a purchase this month! 😉 You went down to the wire, but you did it…

    In all seriousness I was looking at O myself. The REIT sector as a whole has taken a hit. I’ll watch O in the coming days to see what happens.

    Take care,

    The Stoic

  7. Very good and favorably buy! 🙂

    One question: In April you have an income from $5,545. Why do you buy shares for “only” $1,821?

    Best regards and have a nice weekend!
    Onassis

  8. Nice buy DM. I picked up a little Coca Cola myself toward the end of the week. I’ve been watching it for quite some time. I’m hoping to drops another 10% so I can buy my full allocation

  9. I also noticed that in US much less monthly dividend stocks than in Canada….
    At O I was looking several months ago, but at the end decided to buy 2 Canadian REITs CUF.UN and AX.UN that have the best FCF payout ratio and higher yeild… also didn`t want to be exposed to currency conversion. Also recently bought DI.UN (DUNDF in Grey market)that `invest in real estate exclusively outside of Canada, mostly in Germany…. it kinda neat to hold Canadian stock with properties in Europe 🙂 …nice almost 8% yiled

  10. Investing Early,

    Glad to be part of the RE family. 🙂

    Interest rates are going to rise from here, sooner or later. I could have probably better timed my purchase on O, but I’ll average down on it if it corrects significantly from here. I was watching it drop 2% or so a day for about a week and finally decided to enter into a position. We’ll see what happens from here. There are no illusions on my part that I picked it up on the cheap, but I think it’s fairly valued here. A drop of 10% or more from here would have me interested in adding to the stock.

    Best wishes!

  11. Captain Dividend,

    You nailed it! I don’t normally watch the market at all, but I was home sick Friday so I was a bit more active than normal in that regard. I checked once in the morning and sighed when I seen the DOW was up 60 points or so. I then checked in about 2:30 or so and got a bit interested. About 3:30 things began to get really interesting, and finally entered in my order at about 3:58 p.m. That’s ordinarily not possible and I would have rather been at work than home sick, but I think it worked out okay.

    I agree with you. REITs and other higher yielding securities are typically more sensitive to interest rate changes, and certainly REITs because of the nature of their business, so if O drops significantly from here (10% or more) I would be interested in adding to my position.

    I see O is your largest position. You must be quite fond of the company?

    Take care!

  12. Neo,

    REITs have come down quite a bit, and O is no different. I noticed the preferred shares, but prefer common shares in almost every case.

    I think O is one of the better REITs from a dividend growth investor’s perspective. The dividend growth hasn’t lit the world on fire, but they raise the dividend quarterly almost always, even it it’s just a tiny bit.

    Best regards.

  13. Investing Pursuits,

    Thanks for pointing out the video. I’ll have to check that out!

    I think O is a solid company for an entry into real estate. I haven’t had any direct exposure to RE before, so I thought now was a good time to get my feet wet. I’m not overly crazy about REITs in general due to the lower dividend growth and the need to issue new shares to fund acquisitions, but I prefer them to physical real estate ownership.

    Take care!

  14. Spoonman,

    I agree that the valuation isn’t offering a steal here at current prices. I thought now was a good time to enter a position and see where things go. I think the P/AFFO is a bit on the high side, but the yield is more in line with O’s historical norm. Although that’s probably because of that giant raise earlier in the year. I wouldn’t mind buying some more at $40 or so.

    I see DLR has had quite a slide too. What’s your thoughts on DLR vs. O? Obviously a bit of a different business model with DLR focusing on tech centers, but the yield is compelling! That may make a nice second REIT holding for me.

    Best wishes.

  15. Stoic,

    Haha! You know me, can’t keep my trigger finger off the button!

    The REIT sector has definitely been sinking like a ship. I knew it was due for such as the entire sector has been on fire for the last 6-12 months. Bond yields have been rising, so if that trend continues we may see further deals here on O and other high quality REITs.

    I’m sure your patience will pay off! 🙂

    Best regards.

  16. Onassis,

    Well, you can’t forget that I had over $1,500 in expenses for April so that leaves me with about $3k in free capital. So I do have some cash left over in the brokerage account. I hope we continue to see a slide in the broader market so that I can keep putting fresh capital to work. 🙂

    Best regards to you too!

  17. Integrator,

    Nice strategy there! Buy at a reasonable price and then double down if it drops 10%. I like it! 🙂

    I follow the same line of thought. I love averaging down on a company I plan on owning a stake in for the long haul.

    Best wishes.

  18. gibor,

    8% yield? Gotta love that if it’s sustainable. Last time I invested in a company that had a yield that high was TEF and it didn’t go very well for me. I sold right before the dividend cut and got out relatively unscathed. It could have gone much worse had I held for longer.

    But if you did your research and everything looks good, then that’s great! 🙂

    Take care.

  19. I own some DLR and think it is one of the best growth (and dividend growth) opportunities in the REIT sector. Currently DLR is the only REIT I own, but would like to add a few more from the following watch list: LTC, NHI, NNN, UBA, SNH, OHI, O, HCN, HCP, WPC.

  20. It is my largest position yes, a couple of months ago rather than add a new position I decided to add to O instead. Things will even out more as I continue adding to my other positions. My portfolio isn’t as diversified as I want it at the moment. Changes are coming though.

  21. Nice purchase. I also noticed that O has come down in price lately. I’ll continue watching it and hope it’s still available for a good price when I have new capital to invest. It would make a great addition to my Roth IRA, given my understanding that REIT dividends are typically taxed as ordinary income when received in taxable brokerage accounts.

  22. DM,

    I like O but would prefer the price to come down to around $42-43. I kind of see the 5% yield level as my target entry price. I love the fact that they pay monthly dividends. Earlier in the week I sold a put option on O and would honestly love to see the put close at $44.99 on expiration so the shares are put to me. Although maybe a dip down to the $42-43 range and then climb back up to the $48 would be nice. I’ll have a bit of a decision to make if it does continue to pull back because there’s always the risk of having the put executed. Nice buy here!

    I’m interested in KO and WMT with a bit more of a pullback and of course CVX since I just purchased some on Friday as well. I had a very quiet month for purchases like you until the last day finally gave a decent opportunity.

  23. Neo,

    Thanks so much for the thoughts on DLR. I have only occasionally looked at it in the past, but I’ll take a much more in-depth look at it now.

    Best regards!

  24. DGM,

    You are correct. REIT dividends are typically taxed as ordinary income, so that’s something to keep in mind when owning shares. I don’t mind having a little REIT dividend income, however, as my overall tax base once I’m retired will be very, very low.

    I think you could get a nice price on this or another REIT in the near future, especially if interest rates continue to slowly rise.

    Hope everything is well!

    Best wishes.

  25. Pursuit,

    I think the 5% yield mark is a great entry price point. We may get there with O if things continue as they have. I’m looking forward to what the next couple weeks bring us. Could be the start of something great!

    Great buy on CVX. That, and XOM, was high on my watch list, and still is. I’m strongly considering something in the energy sector for a purchase in early June if prices cooperate.

    Take care!

  26. It should also be noted that the stock price of O has outperformed the S&P 500 over the past 2 years, 5 years, and life of the stock. Very good pick!

    OHI (Omega Healthcare Investors) is another good REIT with a slightly higher dividend yield, but similar performance.

  27. I think O is probably a superior investment, but DLR ain’t bad at all. Some people at seeking alpha have deemed DLR “best of breed” in its area. In terms of current valuation DLR is looking more attractive. I think that choosing between O and DLR is similar to choosing between KO and PEP…you just buy both =).

  28. that 87.00 income from “o” can buy 28 packs of top ramen a month there is lunch for a while

  29. O, nice one! Last time I looked at O it was $55 which is ridiculous. REITs have taken a huge tumble recently, which I think was warranted. Maybe because interest rates spiked upward?

    I’d really like to pick up some O or WPC, I will have to start paying attention again. Anyways enjoy the monthly dividends, I think you’ll love it!

  30. O has good support at $40 so wait it out & don’t try to catch a falling knife

  31. Scoonie,

    Great call there. O has vastly outperformed the S&P 500 over the last 5 years. I should have purchased a while ago, shouldn’t I have? Too many stocks, too little capital!

    I took a look at OHI a while back and liked what I saw. I can certainly see the attractiveness of its assets seeing as how we have an aging population. I haven’t watched OHI, and other REITs, as much lately due to the run-up but if they continue to fall they’ll be interesting again.

    Thanks for pointing that one out!

    Best wishes!

  32. Anonymous,

    Thanks for the info there! I don’t look at the technical side of stock prices as much (support, resistance, etc.), but rather just try to find a reasonable price and buy there. If I can determine intrinsic value with decent accuracy and purchase with a margin of safety (typically about 10% or so) that’s where I like to be. On this one I probably paid pretty close to intrinsic value, which isn’t too bad considering the broader market run-up.

    If O goes to $40, I’d be interested in buying more if I have available capital.

    Best regards.

  33. Squeezer,

    To be honest, I’ve never heard of VNR before. I just took a very brief look at it. It has negative EPS and an 8% yield? Seems unsustainable to me.

    Best of luck if you decide to invest!

    Take care.

  34. Compounding Income,

    I agree with you. The tumble that REITs have taken was definitely warranted, and there is probably more to come. I got my feet wet a bit here. I think the interest rates were the primary reason behind that, and interest rates are starting to move on rumors that the Fed is going to taper QE.

    I definitely think I’ll enjoy the monthly dividends! 🙂

    Good luck with the transition back to the U.S.

    Take care.

  35. Spoonman,

    I like that. Love owning both KO and PEP. If you can’t determine the superior investment, and they’re both solid…own both. Also, obviously you have two different kind of REITs (retail vs. tech), so there’s an argument for diversification within the sector there (like KO with beverages and PEP with snacks).

    Good stuff!

    I’ll have to keep DLR and OHI on my REIT watch list for further investments into real estate.

    Thanks for the information. I’m here to learn as much as I am to share and inspire.

    Take care.

  36. I wasn’t trying to be funny or rude on my comment on ‘o’ generating income to buy top ramen is only that small investment can take care that. if get enough of those 87.00 checks coming in there is your power bill gas bill phone bill and everything else you are doing great please keep writing

  37. In REIT FFO is more important number than EPS. I hope DI.UN is sustainable 🙂
    `“Dundee International is currently trading at 10.7 times on a forward price to funds from operations (FFO) basis, compared to its Canadian peers at 14.2 times and German peers at 12.5 times.”

    Dundee International REIT, which went public last year, owns 294 office, mixed-use and industrial properties in Germany.

    Its largest tenant is Deutsche Post, which represents about 83 per cent of the REITs current gross rental income. It is a unit of postal and logistics services giant Deutsche Post DHL.“

  38. DM, was wondering how you set your entry price for specific stock…do you use some tech analysis like 50 days SMA or charts trend line ?

  39. Military,

    Thanks! I hope I’m a happy part-owner of Realty Income for many, many decades to come.

    However, I actually hope this downtrend is a long-term thing. Cheaper shares means my limited capital can go much further (by buying more shares), which in turn means more dividend income. More dividend income means I can retire earlier.

    But if the market does rebound quickly I’ll just continue to scan for the best opportunities I can find!

    Thanks for stopping by.

    Best wishes!

  40. Anonymous,

    I apologize. I misunderstood your comment.

    I completely concur with you. I always think of my dividends in the same way: what bills they can pay. Right now I can cover my transportation expenses and food expenses via dividends alone. That means I’ll never starve for the rest of my life! Feels good to know that I can basically eat for “free” from here on out. 🙂

    Thanks for stopping by and clarifying that. My apologies.

    Take care.!

  41. gibor,

    Interesting that Dundee and Realty Income share a shipper as their largest tenants (Fed-Ex and DHL).

    If you can get that kind of yield and some modest capital appreciation you’re all set!

    Best of luck with the investment!

    Take care.

  42. gibor,

    I don’t use any technical analysis at all.

    I simply try to ascertain the intrinsic value of a company via a variety of methods. I use a DDM or DCF analysis to discount future cash flows or dividends. I compare that number against analysts’ fair value figures (using Morningstar or S&P Capital IQ). Then I look at P/E, P/B, P/S, P/FCF (or P/AFFO in this Realty Income’s case) and compare the current numbers against historical trends.

    That’s the fundamental quantitative side of analyzing fair value. I view the qualitative side as just as important. What’s the company’s story? Do they have an economic moat? Are they likely to be in business in 30 years or not, and if so will they likely be significantly more successful than they are today?

    And finally, I keep in mind that valuing a company is not an exact science. Also, being a long-term investor I try to remember that getting even close to fair value will almost ensure my success because time is on my side.

    Hope that helps!

    Best regards.

  43. What do you see as being a manageable number of positions? You mention you now have 33. Understanding you are a buy and hold guy, you still have to do periodic due diligence on your holdings. At what point do you envision reinforcing positions with free cash versus adding new ones?

  44. Anonymous,

    I’m ultimately aiming for 40-45 positions as a long-term number. At that point I think that the risk of one company causing a major disruption to my lifestyle after a dividend cut/elimination is mitigated to a significant degree. This is only true, however, if the weights are reasonably even.

    As far as reinforcing current positions I’m always open to that. I basically look at what companies are most attractively valued and I also look at portfolio diversification/allocation. For instance, there’s a few companies that are currently in my portfolio that are attractively valued (like INTC, BBL), but I’m already fully allocated to them (for my own comfort level). Some are attractively valued (like BNS, TD) that I could probably add to, but they are in a sector that I’m already a bit heavy on (in this case, the financial sector). There’s a lot I take into account when purchasing.

    I hope that helps.

    Great question. Thanks for stopping by!

    Best wishes.

  45. Nice buy, got to love almost a 5% dividend payout. I’ve heard quite a bit about different REITs in the blogosphere these past few weeks when I hadn’t read about them before. They sound like a good way to diversify yourself into real estate without having to buy and maintain a rental property.

  46. I think this is a great purchase. I bought Realty Income as well earlier (at around 50 a share) and I am ready to buy more later as the stock is going lower. The dividend income of this stock is excellent.

  47. What do you think about buying more O now that it’s 5% lower than purchase? 5% might not be a huge downward move, but it in effect wipes out the 4.5% dividend yield for the year.

  48. Jake,

    That’s exactly it. REITs allow you to diversify directly into real estate as an asset class without having to own physical property. I like the idea of collecting rent, but equally dislike the idea of having to worry about tenants directly, repairs, maintenance and a management company.

    For instance, a pipe behind my shower just sprung a leak and flooded the condo downstairs below me. A big problem, obviously and now the owner had to get involved and get the insurance company out here and a plumber to tear apart my shower. It’s events like that that makes me stay away from owning a rental property. People like to make it sound like it’s all roses…until you start seeing weeds.

    Best wishes!

  49. Martin,

    I definitely enjoy the yield on O. Gotta love a monthly dividend payout! Just like collecting rent. 🙂

    If O drops significantly from here I’d be very interested in increasing my position. We’ll see what happens!

    Take care.

  50. Sam,

    For me, I don’t plan on owning a lot of O or any other REIT to be honest. I like the prospect of having a little exposure to real estate and I certainly can see the benefits of juicing my portfolio yield a little, but I’ll likely keep my allocation to REITs fairly low.

    However, if O were to fall to around $40 or so (a 10% drop from my purchase price) I would be interested in averaging down. As long as fundamentals haven’t changed and it’s simply a market pricing issue I’d be interested in buying more there. I think it’s fairly priced or slightly better right now. $40 would offer a 10% margin of safety from what I calculated to be fair value, so that would be wonderful.

    Best regards!

  51. Shop Teacher,

    O is a real estate investment trust. As such, you can’t use earnings to value the company or show profitability. You must use funds from operations or adjusted funds from operations (FFO or AFFO) to value the company, determine the payout ratio and also show profitability. The reason you can’t use earnings is because REITs typically have large amounts of depreciation.

    I hope that helps!

    Best wishes.

  52. Thx for sharing your O purchase. I noticed it has a payout ratio of 202% and a p/e of 56. Is there something I am not understanding cause those numbers seem scary high to me?

    Any perspective you could share would be mucho appreciated.
    Thx

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