Recent Buy

Well guys, I’m doing the best I can in this market. I’m not seeing a ton of compelling opportunities out there, but I do see that Real Estate Investment Trusts as a group have taken quite a tumble lately. It could be due to a rotation out of higher yielding securities and into cyclical plays, or it could be that the Federal Reserve Chairman, Ben Bernanke, has hinted toward a tapering of QE if the economy continues to improve (which could cause interest rates to rise). It’s not really my concern as to the “why”, but rather the “how can I take advantage of this”. And the best way I can think of to take advantage of this situation is to start purchasing high quality real estate investment trusts at attractive long-term prices relative to intrinsic value.

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 25 shares of Digital Realty Trust, Inc. (DLR) on 6/3/13 for $59.34 per share.

DLR was not even on my radar until very recently. Some of you readers started commenting about the company and hinted that it could be a good value at current prices. So I decided to do some due diligence and find out as much about the company as I could. I liked what I saw and after seeing the stock fall almost 3% on Monday (with the Dow Jones up almost 1% for comparison), I decided to initiate a position with this REIT.

DLR has been particularly weak lately, and is down -13.48% over the last month.  This is likely due to the fact that REITs have been weak in general, but also because a hedge fund manager, Jonathan Jacobson of Highfields Capital Management LP, stated it’s a stock to sell short and is only worth $20 per share. I didn’t view the argument as particularly compelling, but I’m glad he made it public because DLR has become a pretty attractive value after the comments were made in early May.

DLR is a Real Estate Investment Trust that owns data centers and leases them out to high quality tenants with long-term leases in place. They own 122 properties with 22.7 million rentable square feet in over 30 markets throughout the world. They have approximately 2,000 leases with over 550 tenants. While North America currently accounts for about 80% of their annualized rent, Asia is a big growth opportunity for the company and they currently own properties in Hong Kong and Singapore. They are looking to expand aggressively in China and Japan.

They work with three different sets of clients. First is Colocation & Cloud, Managed Service Providers/System Integrators (think International Business Machines (IBM)). Second is Corporate Enterprise Users (think PepsiCo, Inc. (PEP)). Finally, we have International Network & Telecom Providers (think AT&T Inc. (T)).

While no single tenant accounts for more than 9.1% of annualized rent, they aren’t as diversified as some of the other REITs I’ve looked at. They do have some very high quality tenants to count among their biggest clients, however, like Facebook Inc (FB), AT&T Inc. (T), Verizon Communications Inc. (VZ) and Morgan Stanley (MS). The great thing about DLR is that they have consistently high same store occupancy rates (typically above 93%) due to high barriers to exit  (typically tenants have considerable equipment and technology in place). They should continue to see very stable, and rising income streams going forward as their average lease term still has 6.9 years remaining. Also, as IT and cloud computing continue to grow DLR should see a continued piece of that pie. The great thing about this company is that there are high barriers to entry as new data centers require significant capital and specialized experience. These buildings also require specific cooling and electrical needs that can’t be served through normal retail structures.

What really struck me about DLR when I started to look into the company was the history of spectacular growth since they went public late 2004. They have a compound FFO growth of 18.7% since that time, which is phenomenal. The dividend growth is obviously one of the first places I looked and they’ve growth dividends by a CAGR of 15.3% since 2005. Again, phenomenal. Especially considering the high yield you get with this security. The current entry yield on this stock is 5.27%. I don’t anticipate the dividend growth to continue at such a robust rate, but I’d be happy with mid-to-high single digit FFO and dividend growth. The most recent dividend increase was 6.8%, with the new dividend payout at $0.78 quarterly per share over the old rate of $0.73 quarterly per share.

Looking at the valuation, DLR is fairly attractive here. I would ignore the P/E ratio on this one because REITs are better valued by using FFO (Funds From Operations) which represents earnings with depreciation and amortization added back in to give a more accurate picture of how profitable the enterprise is. The P/FFO is right about 12.9 right now. Using a Dividend Discount Model while using the same assumptions (10% discount rate and 5% long-term dividend growth rate) as I used with my recent purchase of another REIT (Realty Income Corp. (O)) I get a Fair Value on shares at $65.52. I think a margin of safety exists here of at least 10%, and this is one of the better opportunities in the market if you believe in the long-term story of increased data storage needs, server businesses and cloud computing (which I do).

I’m likely done buying REITs for a while now as I wanted to dip my toes into this sector and get my feet wet. I think there is some value to be found here but typically I like to concentrate on companies with significant competitive advantages via brand name products or proprietary services, significant economies of scale, lengthy history of share buybacks and dividend raises (I always prefer the latter). REITs typically have lower dividend growth and have to issue new shares to fund acquisitions and growth, so while I appreciate the high yield they offer my portfolio for current income to “supercharge” my reinvestment abilities, I plan to keep REIT exposure to 5-7% of my entire portfolio. 

This purchase adds $78.00 to my annual dividend income based on the current payout.

I currently have 34 positions in my portfolio after this purchase, as DLR is a new investment.

I usually like to include analyst valuation opinions on my purchases, but neither Morningstar nor S&P Capital IQ track this stock.

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

Full Disclosure: Long DLR, O, PEP, T

What are you buying? See any compelling values out there?

Thanks for reading.

Comments

    • says

      DGI,

      I ran across, and read, both your recent articles on DLR when doing my research on the company. Great stuff there and I completely agree with you in regards to the public shorting being total baloney. Of course, it looks like he’s done well for himself seeing as how far DLR has fallen since he made his position public. A shame really, but of course REITs have fallen as a group so I guess it was serendipitous for him.

      Keep up the great work over there!

      Best wishes.

  1. Anonymous says

    took2summit here,

    nice job. i bought 100 shares of dlr today at 59.24. i agree with you there is good value to be had here. i also bought 200 shares of ppl today. was an active day for me!

    • says

      took2summit,

      It looks like we were definitely on the same page here regarding DLR. Nice job! It looks like it’s still falling, but I don’t really care. If it falls significantly then I would consider that an opportunity to average down.

      I wanted to ask, however, what is your thoughts behind PPL? The dividend growth has been anemic. The valuation is certainly low, but I do wonder if that’s because the growth has been so low? The stock has basically gone nowhere for the last 5 years, which is surprising with the run-up the market has had over the last three years as well as the participation that other utilities have had in that rally.

      I have never really looked at it until just now, so I’m simply looking for some insight. The yield is compelling.

      Best regards!

  2. says

    DM, I checked the stock DLR, and it looks like a great stock. 4.9% yield, 20% growth… I will add this baby to my watch list.

    • says

      Martin,

      Glad you like it. I wasn’t aware of the company until just very recently, so you can thank other readers and Dividend Growth Investor for digging it up!

      Happy shopping.

      Take care!

    • says

      MFIJ,

      The prices continue trending down, so you might be able to get a really great price on O and DLR, or another REIT if you prefer. If they fall significantly from here I might take an opportunity to add. I think O has more room to move down than DLR.

      Good luck!

      Best wishes.

  3. says

    I don’t like REITs in general (especially with low interest rate) but I can tell that DLR seems appealing. Are their assets well diversified?

    I bought McDonald’s (MCD) and Disney (DIS) this month. They are not cheap but the growth potential is definitely there for the future year. Those are more “buy forever” stocks.

    • says

      Mike,

      DLR’s assets are actually well diversified and they are global company, which I think is wonderful. My only issue with the company is that the tenants aren’t as diversified, as telecom providers like Century Link and AT&T make up a good portion of their annualized rent. CTL is 9.1% of their AR. Assets are very well diversified, but tenants are not as much as I’d like them to be. Of course, we’re talking about a company that provides data centers, so your clientele is a bit more limited than a retail equity REIT like Realty Income who can rent to just about anyone who needs space or a storefront of some kind.

      I like your buys there! I’ll have to take another look at Disney. I love that purchase of the Star Wars property. Some say they payed too much, but it seems to be a very lucrative venture if you ask me.

      Best regards!

    • says

      Anonymous,

      I don’t try to forecast interest rate movements, but rather focus on high quality companies that have a high likelihood of continuing to pay out and raise the dividends. And I think O and DLR passed that test. The prices could (and probably will) go lower from here, in which case they are an even better buy and I would have to consider averaging down if the portfolio allocations were in line with my target.

      Take care!

    • says

      REITs will definitely underperform in a rising rate environment. DM, do you think rates will stay flat from here?

      REITs are tempting after the sell-off though. Perhaps buy more O given it’s sold off a little more this week?

    • says

      Sam,

      Like I said above, I’m not here to predict interest rates movements. It’s not necessary for me to try to do so to be successful at what I’m trying to do. I anticipate interest rates rising from here obviously, but when and how much? It’s anyone’s guess. People who try to focus on interest rate changes and the dollar value vs. the yen and what’s going on in Washington have nothing in common with me, unfortunately. That’s stuff for CNBC and traders. I’m a long-term investor, so I invest with the intent on holding for “forever”. Companies like DLR and O have been operating in much higher interest rate environments and have done well, and I anticipate that to continue into the future.

      As far as O goes I would definitely be interested if it fell to $40 or so. I don’t plan on making REITs a large part of my portfolio, so I like the fact that I have a little room to expand on my holdings. I don’t want to go crazy right now in case they fall further, but a 10% drop or so from my purchase price would get me interested if I felt the fundamentals were unchanged.

      Hope that helps!

      Best wishes.

    • Anonymous says

      When mortgage rates are at all time lows it not that difficult to figure out which why they are going to be headed.

  4. TiglatPileser says

    Hi DM,
    answering your question: I’ve been rather active these days too,

    initiating a position in Potash Corp of Saskatchewan from Canada

    adding to my position in Banco Santander from Spain (I have added for quite a while now. I see this as an admittetly risky bet on the future of Spain as a country in principle but frankly speaking I cannot imagine Spain falling and failing forever)

    initiating a position in Suez Environnement which had fallen below 10 EUR. This means a pre tax yield of 6.5%; however Suez Env. grows its dividend rather irregularly and slowly. Unfortunately French companies’ dividends arrive at my account rather dishevelled because of the double taxation but I am looking forward to a rising dividend in the long run in a business (water and waste) that despite its cyclic will see a rising demand.

    • says

      TiglatPileser,

      Thanks for giving me the rundown on your activity. You have been rather active, indeed!

      Best of luck with all those investments. Sounds like you’re really putting some capital to work and that’s fantastic!

      Take care.

  5. says

    Wow, I totally agree that the opportunities are rather hard to find right now. I seem to find a reason not to buy almost everything I look seriously at. But I know this can’t go on forever…

    • says

      Nick,

      It’s tough to find anything particularly compelling right now. I think DLR is a solid opportunity if you’re not averse to owning a REIT and you believe in the future of data centers, cloud computing and the need for server access. I think the future is bright there as everything continues to move to the cloud and online usage. There is a lot of growth especially in Asia, and I believe that’s why DLR wants to expand in that region.

      Best regards.

    • says

      Jake,

      Thanks!

      Tough to find anything to not like about a 5%+ yield with the kind of growth DLR has been seeing. I would be happy with growth at half the historical rate, which should obviously be achievable given the history and the growth prospects moving forward.

      Best wishes!

  6. Onassis says

    Hi Jason,

    DLR has “only” a market cap. from 7.6 Bil. USD.
    When is a company too small for your portfolio?
    What is at least the smallest market capitalization you are willing to accept?

    Best whishes! :-)

    Onassis

    • says

      Onassis,

      I don’t place a limit on how small of a company I’ll invest in. Rather, that’s where you can sometimes find the best growth opportunities looking forward because it’s a lot easier for a really small company to grow at a healthy clip than a gigantic company (usually).

      The smallest company in my portfolio right now is SBSI with a market cap of only $410 million USD. And that’s after a healthy run. It was worth less when I invested in the company.

      Best wishes to you too!

  7. says

    Good buy. I always wanted some REITs in my portfolio and now seems the time to start accumulating some. Basically all the REITs had quite a correction downwards! When I have some time on my hands, I’m going to analyse them better to understand the underlying economics better.

    Any more REITs you have on your watchlist besides O and DLR?

    Take care.

    • says

      ED,

      I would definitely suggest getting to know how they work and whether or not they fit into your portfolio. Keep in mind they do count towards an allocation to real estate, so if you own your home then that might throw off any allocation targets you have. I rent, so having 5-7% in real estate makes sense for me. Too many people unfortunately have almost all of their wealth tied up in real estate (their home).

      To answer your question, I looked at OHI briefly. Looks solid, but has had a monster run-up and has not corrected as hard as some others. Right now I’m comfortable with DLR and O, and would consider O probably one of the strongest REITs a dividend growth investor can own. That would be my first pick. However, the valuation shows the quality.

      Best wishes!

  8. Spoonman says

    I think you chose well. DLR has been getting unfairly punished of late, but that gives investors like us a great buying opportunity. I’ve been averaging down my position these past few weeks.

    O is still taking a dive, so I might pull the trigger on that one soon.

    The market is finally starting to let up a bit, and I can sense a sigh of relief from the dividend growth investing community. I never believed this market rally was anything more than QE-powered rally. The mere hint of a negative movement by the Fed sends the traders running for the hills.

    Cheers!

    • says

      Spoonman,

      I guess I’ve joined great company. I do see DLR has been killed lately. It seems that Jacobson is making some money on his short now. Good for him (rolling my eyes).

      I’m very happy the market is starting to show some weakness. I would love to see the market just start to really tumble at the first whiff of a sure tapering of QE. I think the broader market, as a whole, is modestly overvalued here. Nothing crazy, but certainly not poised to offer outstanding returns moving forward. I’d like to see it come down at least 10%.

      Take care!

  9. says

    It looks like you went from having no REIT’s to buying two in a matter of a week. See, you did find some good buys out there after all. Nice work! I just wish REIT’s issued qualified dividends.

    CD

    • says

      Captain,

      My, how things change! I should have looked at REITs a couple years ago when they were much cheaper, but I was just really starting to build my portfolio around high quality companies. It’s for the best. I’m only looking for a very modest allocation to them anyhow. I certainly appreciate the high current income, but they come with increased tax liability and lower expected growth. I think 5% or so is a good allocation to me, similar to where I’d like to be with utilities.

      Take care!

  10. says

    I was looking at some REITs back in February and DLR caught my eye when it was trading around $65. Two things that bothered me about DLR were (1) as a data-center REIT, it faces some pressure to keep up with newer technology; (2) bigger tech firms can build their own data centers rather than rent space from DLR, which means less business and more potential competition. These were medium-sized concerns that did not apply to other REITs (e.g., office, retail, and industrial), so I was a bit uncertain about whether I’d be taking on additional risk in that space. I ultimately decided not to start a position at that time. However, this was before the flurry caused by that hedge fund manager’s presentation in May, so there’s been a lot of commentary and analysis about DLR that it would be good for me to catch up on.

    • says

      DGM,

      Great thoughts there.

      First, it is a bit of a quasi-tech holding. But I’m okay with that because my allocation to tech (currently only INTC) is low. If you’re not comfortable with technology at all, DLR may not be for you.

      As far as big tech firms building their own data centers, when doing research I came across news that Google and Amazon were doing that. However, from what I can tell that’s not to be a competitor of DLR and somehow spin-off a REIT business, but rather to simply build their own data centers and own everything under the roof. It’s consolidation. That’s okay because it doesn’t really hurt DLR anyhow – I couldn’t even find Amazon or Google on their list of tenants (if they are tenants, they’re very small players). I don’t see Google going into the data center business. Just wouldn’t make sense.

      I think the valuation is compelling here. The only thing I really don’t like about the company is the high allocation to Century Link as they account for 9.1% of annualized rent. I don’t care for that company, and even if I did I wouldn’t like ANY company to account for that much of the rent. I hope that changes as the company grows, especially in Asia. That allocation could be just high right now because 80% of their rent is coming from the U.S. Some of their recent acquisitions were overseas, however – Paris and Toronto, if I remember correctly (along with a portfolio in Austin).

      Hope that helps!

      Best wishes.

    • gibor says

      “Some of their recent acquisitions were overseas, however – Paris and Toronto”…. DM, Toronto is not overseas :) we are here …close…:)

      Nice shot with DLR, when DOW more that 200 downm DLR is sharply up (actually O also)… Impressive!
      I;m a bit scare of techology too… we have only INTC (pretty big position from my wife’s passed ESP), AAPL and XLNX (small position that my wife encoriged to buy into her LIRA). I had big position in ZQQ (Canadian version of QQQ), but booked some gains about month and half ago and sold.

    • says

      gibor,

      Whoops! ‘Overseas’ was definitely the wrong word there. Thanks for the catch. :) I was trying to convey international exposure/growth. My apologies.

      If you are averse to exposure to tech, DLR might give you pause. However, I’m also tech averse and I felt comfortable owning this, because in the end we’re still talking about real estate and buildings. My only true tech holding right now is INTC as well.

      Take care!

  11. Anonymous says

    if dave ramsey and suze orman can write books so can you. you are more popular than you know.i was at the gym the other day and I heard you site mentioned.you have the writing talent and you have proved your knowledge.i think you should give it a shot.

    • says

      Anonymous,

      Thanks for the kind words! Writing my own book would be a thrill. I guess I have quite a nice source of content to start from, using this blog. :)

      That’s amazing you heard about my blog at the gym. That’s crazy! The growth lately has been wonderful and I’m really still shocked by it all. I just hope that I continue to inspire others out there!

      Best wishes.

  12. gibor says

    Agree with Anonymous, but maybe not books, but subscription website like dividend.com , if they can publish best dividend stocks (that stays untouched by months) and upgrades/downgrade , you can do it much better looking at your picks.
    btw, do you publish your articles on seekingalpha.com ?

    • says

      gibor,

      I was actually talking to Kraig over at Young Cheap Living not long ago about ways to monetize a web presence. He’s pretty excited about making a living online and I’m really supportive of him. I’ve been a bit apprehensive about trying to really do something like that (other than the very few ads you see on the site) because I’m afraid it would come across poorly. I don’t want people to think that I’m simply trying to make a buck off of them or something, but I do wish that the immense amount of time I spend was somehow better better rewarded monetarily.

      It’s okay, however, for right now. I find the non-monetary rewards to be wonderful. Getting to inspire people on a regular basis and getting to share with like-minded people like yourself is a huge reward in itself. I’m in a wonderful position, and I consider myself very lucky.

      Thanks for the thoughts. I appreciate it!

      Best regards!

    • gibor says

      DM, I agree with you that this is kind of investment… and yes, maybe you can earn, but maybe you’ll spend more…:)
      However, I’ve heard that you can earn some $ publishing articles on seekingalpha… more people read your article – more you get

  13. Steve says

    I have also purchased DLR as well as SNH recently. I had a stop loss order on O for a few shares since it was going so crazy. It triggered at $54 and change. I took the cash and put it into DLR and SNH. I’m really happy with how it worked out. O was the only REIT I had and now I feel a bit better about my diversification in this area.

    Like you, I will probably be careful about the weighting on REITs but I will probably never invest in brick and mortar real estate because I don’t want the hassle. REITs is a good fit for me to be in real estate for the long term.

    Steve

    • says

      Steve,

      I’m completely with you. I also have no desire to invest in physical real estate due to all the headaches it comes with. I was just mentioning in another post about how my shower sprung a leak and flooded the condo downstairs below me. Imagine that kind of nightmare? The owners have to get the insurance company involved and a plumber had to come out and punch a hole in my shower to access pipes behind the shower. Owning a rental property is certainly not all roses like it’s made out to be. A REIT is maintenance free! :)

      Of course, you will likely sacrifice some returns over direct physical real estate ownership. I’m okay with that, however.

      Best regards.

  14. Anonymous says

    Took2summit here, sorry I keep logging in computers that won’t let me log into my google account.

    Anyways to answer about PPL. I agree with you it’s not the nicest looking DGI stock anyway you slice it. Their dividend history has been mediocre at best, although they are finally in 11 straight years of increases. you say their dividend raises have been anemic, while true in the last couple years, the dividend has increased 147% over the 11 years which is a good pace for me. However, the single biggest thing that sold me was their valuation. They’ve had a tough 5 years on their EPS and the market has punished them for this. They are at a great point where the future appears rosy but the stock price is still lagging, a perfect time to initiate a position. They are now projected to grow their EPS at 8% a year over the next 5 years which is markedly higher than any other big utility compnay, I think the next best I could find was SO at about 5%, and PPL’s PE is only 12.64, while SO is 18. Their projected earnings is better than any other large utility company, and their PE is lower then any of them. Basically they have by far the best valuation available in today’s market.

    That’s my 2 cents on PPL and I forsee myself being a happy shareholder 1 year, 5 years, and 15 years from now.

    P.S. I’m loving our DLR pop today! I gotta remind myself I’m buying income and not day trading, I nearly sold DLR today after the pop since it’s in my retirement account I wouldn’t pay taxes. Alas I reminded myself I’m in the business of buying income, not in gambling.

    • says

      Took2Summit,

      Thanks for the insights on PPL. Seems like it has a bright future if the EPS growth is projected to grow that high. That’s pretty high for a utility. I certainly hope that comes to fruition.

      DLR did pop quite a bit today. From what I can tell it was from an analyst buy reiteration from TheStreet. Not really a big deal, but I suppose it is nice to get some validation so quickly. We’ll see what happens. I think it’s a cheap stock right now, even after the pop.

      Good idea holding! Buy for the long-term. :)

      Best wishes.

  15. says

    Nice work DM. I used to hold REITS like O and what was CIT several years ago. I’ve since developed a preference for holding core industrial companies, but the underlying attractiveness of healthcare reits and even data center reits remains pretty sound in my view

    • says

      Integrator,

      Thanks for stopping by!

      I hear you on the preference. I have the same preference. I have only recently begun expanding into real estate, and even then will likely hold my exposure down to a minimal amount of the overall portfolio (5-7% as mentioned above). I prefer normal C-corps with fantastic, brand name products or services.

      Best regards!

Join The Discussion!

Recent Buy

Boy, 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.

Comments

  1. says

    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. =)

    • says

      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.

    • says

      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!

    • says

      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!

    • says

      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.

  2. says

    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.

    • says

      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.

  3. says

    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.

    • says

      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!

  4. Spoonman says

    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!

    • says

      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.

    • says

      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.

    • says

      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!

    • Spoonman says

      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 =).

    • says

      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.

  5. says

    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

    • says

      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.

  6. Onassis says

    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

    • says

      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!

  7. says

    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

    • says

      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.

  8. gibor says

    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

    • says

      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.

    • gibor says

      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.“

    • says

      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.

  9. says

    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.

    • says

      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.

  10. says

    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.

    • says

      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!

    • says

      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.

  11. Scoonie says

    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.

    • says

      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!

    • says

      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.

  12. Anonymous says

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

  13. says

    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!

    • says

      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.

    • says

      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!

  14. Anonymous says

    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

    • says

      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.!

  15. gibor says

    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 ?

    • says

      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.

  16. Anonymous says

    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?

    • says

      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.

  17. says

    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.

    • says

      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!

  18. says

    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.

    • says

      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.

  19. says

    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.

    • says

      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!

  20. says

    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

    • says

      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.

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