And the march to financial independence continues. As many of you readers are aware, my whole plan to reach early retirement revolves around living well below my means and investing any surplus capital I have into high quality dividend growth stocks – that is to say companies that pay out a portion of their profits to shareholders in the form of dividends, and then further reward shareholders with regular raises of these payouts (as profits rise in turn).
If this is a strategy that also interests you, you may be served well by choosing a few companies to invest in that not only regularly raise their dividends, but also take pride in it and advertise it. If a company hangs it’s proverbial hat on the fact that they are loyal to shareholders via dividend payouts, that ensures the company will be interested in continuing the corporate message.
My most recent purchase involves a company that advertises itself as “The Monthly Dividend Company”. It’s hard to be more overt than that! And when it comes to rising dividends, I like overt.
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 previously discussed O as well as why I like it when I completed my first equity purchase in the company back in late May. I purchased it at what I felt was a fair value to pay for the company, but continued weakness in the real estate sector has allowed me to nicely average down on shares in this wonderful real estate investment trust.
Not much has changed in the last three months other than the price of O shares. The business is essentially the same, however I’m simply paying less for my ownership stake now. Not much to dislike about that idea! Cheaper shares means more dividends for the same amount of money, which can then be reinvested at an even cheaper rate which further bolsters my ownership position in the company. I’ll root for static or declining stock prices on an otherwise fundamentally wonderful company any day of the week!
O is a Triple Net REIT with 3,525 properties scattered across 49 states. They have high quality tenants like Family Dollar, Fed-Ex, Walgreen’s and CVS Pharmacy. O leases structures on a Triple Net basis, meaning that the tenant or lessee agrees to pay the real estate taxes, building insurance and maintenance. This puts O in a very nice situation. In addition, many of their tenants are retail-based and the buildings are located in high traffic areas where long-term leases are typically held and renewed due to location-specific business.
O has one of the best track records of any REIT one can invest in. The business has a 44-year track record of success, and has paid out 516 consecutive monthly dividends, with 63 consecutive quarterly raises. They typically have an occupancy rate above 97% with a weighted average remaining lease length of just over 11 years. This is a great way to get exposure to real estate and the monthly checks that would come with owning and renting real estate without the need to actually go out and physically buy it. I’m more than happy letting the management team behind Realty Income Corp. find and acquire high quality real estate assets and then send me a check for being an investor. That’s an arrangement I’m very pleased with! The last thing I really want to ever deal with is a phone call about a broken toilet or a question about a lease agreement or have to go and change carpet or fix walls. I’m just not that handy, and I don’t really have a desire to be so. An investment in a high quality REIT like Realty Income allows me exposure to real estate and monthly “rent” checks without all the worries that come with owning rental properties.
O has significantly underperformed the market over the last 3+ months as interest rates have been on the rise and REITs were overvalued after a huge run-up to start the year. O is down over 28% after reaching a 52-week high of $55.48 in late May. My purchase prices comes very close to the 52-week low of $37.33. If I can get shares in a great company near their 52-week low while the broader market is near all-time highs I’m in a pretty good position. O is trading for a P/AFFO of 16.2, which appears attractive here considering that O usually trades at a premium to many other REITs due to the high quality nature of its assets, the stable tenants and long track record of operational excellence.
O has been growing the dividend for 19 years, and looks to be on track to continue that trend going forward. The 10-year dividend growth rate is 4.2%. I received a pretty strong entry yield on my purchase of 5.64% based on the annual dividend rate of $2.179. O is continuing its dedication to paying and raising the dividend, as evidenced by the fact that they raised the dividend by 19% earlier this year.
I previously performed a Dividend Discount Model analysis to value shares using a 10% discount rate and a 5% long-term growth rate. That gave me a Fair Value on shares of $45.68. O would only need to keep up a 4% long-term growth rate for my investment to produce 10% returns.
This purchase adds $65.37 to my annual dividend income total based on the current dividend payout.
I currently have 39 positions in my portfolio, as this was an addition to an existing investment.
Some current analyst opinion on my recent purchase:
*Morningstar rates O as a 4/5 star valuation with a Fair Value estimate of $44.00.
I’ll update my Freedom Fund in early October to reflect my recent addition.
Full Disclosure: Long O
What’s your thoughts on Realty Income? Interested in REITs right now?
Thanks for reading.