Recent Buy

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 purchased 30 shares of Realty Income Corp. (O) on 9/3/13 for $38.62 per share.

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.

Comments

    • says

      Jersey Jerry,

      Glad to have you as a fellow O shareholder!

      I’d LOVE to own a piece of GIS. I really missed my opportunity when it was around $42/share. After Buffett bought Heinz it was all over. I just can’t bring myself to pay 20% more than I was willing to. I think it’s fairly valued today, but I wouldn’t say it’s particularly cheap. On the other hand, it’s a very high quality company so the margin of safety one would require would be likely small with a company like this.

      Best regards!

    • Anonymous says

      exactly my thought! I had an itch to buy saw it dropped a bit and figured let’s do it. I’m not in big but in…. which is all that matters if I’m long term!
      -Jersey Jerry

  1. Anonymous says

    I hold some O, and was wanting to add more, yet this paycheck doesn’t leave me with enough extra. Middle of the month, hopefully O is still affordable, as I’d like to average down. It really is a game of when to buy, and when to just leave cash in the account. Most of the time I want to go shopping asap…
    Cheers,
    Skottoman

    • says

      Skottoman,

      So many stocks, so little cash. I have the same problem!

      I hear you on patience. It’s tough to have cash sitting on the sidelines when it could be put to work. For me it all depends on what I see. If I see quite a few attractive opportunities I’m likely to spend cash as soon as I get it. If I’m less optimistic about most of the companies I track and I see little to get excited about I’m likely to stay patient and sit on cash for a while.

      Take care!

  2. says

    I correctly anticipated that you might be buying another batch of O shares — nice purchase! I’ve been watching O closely myself and I would like to add it to my portfolio at some point. It is slightly below my conservative fair value estimate of $41-42, so I think it’s trading at a decent price. If it continues to fall, then I’ll eventually be compelled to make a purchase, although I’m running out of room in my Roth IRA (which is where I would want to hold it).

    • says

      DGM,

      You guessed right!

      There’s some other names I’m looking at right now. KMI is high on my list, and I think you made a great buy there. It’s currently trading very close to my cost basis. If it dips much less than that I’ll look to buy. BCE is another I’m looking at. BP is also up there. WMT is also very high on my watch list. I don’t have enough capital for them all, but I do have enough for a couple of well placed purchases.

      Best wishes.

    • says

      Dividend farmer,

      I looked at LEG quite a while ago around $23/share. I passed for some reason or another. I think it was the low growth. I should have bought. I may have to consider it again.

      Take care!

  3. Spoonman says

    Thanks for the great article. I’ve had O on my crosshairs for years and I think I will finally pull the trigger. I think this is a great company to buy below $40. Now, I just hope that the price can hold steady for another week so I can load up on it!

    • says

      Spoonman,

      I agree. O looks very solid below $40. I hope it stays at this level so you can buy in. :)

      By the way, Kraig and I recorded Episode #4 of the CFF Podcast and we discussed one of the topics you brought up in the feedback. Hopefully you like it.

      Best regards!

    • Spoonman says

      Yes, I heard the podcast this morning during my commute (thank you for lessening my commuting pain!). I really like what you guys are doing with the podcast. The fellow that Kraig interviewed is really an inspiration for everyone in the community. Although his version of financial freedom is somewhat different to what you and I are pursuing, what he is doing totally beats the usual 9-5 grind. I think intervewing someone like him is of tremendous value not only because his story is inspirational, but because he presents an alternate way of thinking that some of us may find very useful. I think at some point all of us will end up doing some sort of self-employment or freelancing gig, so his advice will come handy.

      Thanks again for the podcast!

    • says

      Spoonman,

      Oh cool! You listened to Kraig’s new podcast? I knew he was going to start a second podcast on his own. Glad you enjoyed it!

      I agree that firsthand experiences in freelancing or self-employment is great. There’s many of us early retirees that will likely be doing something for money, and the more ideas and tips the better.

      We’ll be posting Episode 3 next week, and you’ll hear the topic you suggested. :)

      Best regards!

  4. Anonymous says

    “O” my god – another purchase?

    Every time I log onto this website it seems like you are buying more stock.

    AWESOME!

    Roger H

    • says

      Squeezer,

      I agree. Monthly dividends are very nice. Makes it a lot easier to reinvest as the rate of reinvestment is much quicker. This is especially so if you’re just starting to build your portfolio.

      Take care!

  5. Anonymous says

    Good job on the price DM – I’ve been mirroring you on these REITs. I have O, ARCP, and DLR. I averaged down on DLR a while back. I currently have 7 companies in my portfolio now and plan to continue trying to buy every month also. I hope to one day have 40 to 50 businesses overtime.

    I have some capital now but afraid to add anymore to the REITs since I only have 7 companies 3 of which are REITS. Any other companies (non-reit) that you are eyeing or almost bought?

    We both have the same goals by the way as far as wanting to retire in 7 to 10 years and live abroad . I’m wanting the monthly income to support me from these investments so I can indulge in that precious entity called “time”.

    Sincerely,
    Nomad

    • says

      Nomad,

      It looks like we definitely share a vision! I wish you all the luck in the world in attaining a high quality portfolio and getting to the point where you can live off the passive income. :)

      As far as REITs go, I’m really glad you’ve found value in some of my ideas. I obviously believe in these companies because I put my money where my mouth is. However, I don’t want to have much more than maybe 5-7% exposure to REITs. The income is wonderful, but the growth is typically less than with some other equities you’ll see in tech, healthcare or consumer discretionary sectors. Only you can know what you feel comfortable with as far as individual weightings, but that’s where I’m at.

      I’m looking at a few companies right now. I like KMI after the recent drop. I’m also looking at BCE as a high income/value play. WMT is high on my watch list. BP is also a nice income play, but the risk is a bit higher than what I’m used to with the ongoing litigation. I also like GE at today’s prices. Those are some of my ideas right now.

      Best regards!

    • says

      Roadmap2Retire,

      The monthly dividends are very nice. I would say that’s definitely one of the more attractive aspects of O as an investment. I don’t particularly need monthly dividends at this stage of my investment arc, but they are nice to have.

      Thanks for stopping by! :)

      Take care.

  6. says

    I am a fan of REIT’s and as everyone who talks to me about dividends knows I am a huge fan of The Monthly Dividend Company. Tom Lewis has done a great job managing the company and just announced plans to retire. I look forward to him mentoring and strengthening John P Case to take over and continue running this REIT dividend powerhouse. Regular monthly dividends as well as the quarterly increases are awesome and I am looking forward to receiving them for many years to come!

    • says

      SWAN,

      I’ll also be interested to see how the management transition goes. I’m hoping it goes smooth. Tom Lewis has been at the helm for quite a while now, but I can’t see how this company doesn’t continue its stellar operational record. Case is taking over a wonderful company with wonderful assets in place. I think we’ll be sitting pretty as investors for quite a while. Case has been with the company in an executive role for three years now, so I think he’ll be ready for the job. He’s also been an investment banker for 20 years.

      Cheers!

  7. says

    I think O is still somewhat expensive at these prices. The average payout ratio for O over the last 10 years is 87%. I believe the AFFO (ttm) is around $2.50 per share. I’m basing that number off the average payout ratio, but it could be lower according to O’s latest earnings release since the first 6 months AFFO per share was $1.19 per share.

    Anyways, the average AFFO per share growth over the last 10 years is 3.53%. So if you add the current dividend yield plus historical AFFO growth rate you get 3.53% plus 5.50% equals 8.85%. One can expect to compound at that rate if the price paid was reasonable. The P/AFFO (39/2.5) currently is 15.60 pretax. After taxes it, assuming 30% tax rate, the P/AFFO increases to 22.30. So paying 22 times earnings for a company that grows AFFO per share at about 4% annually with a return on equity of 12% (10 year average) and return on capital of 7% (10 year average) seems a little pricey to me.

    But I’m sure over the long term O will do just fine. My cost basis is around $35. And I estimate the fair price to be around $33-34-ish.

    Just my 2 cents. Keep up the great work!

    • says

      Henry,

      Well, analyzing a company is part art and part science. And intrinsic value can have quite a range on it, as ten different people are likely to arrive at ten different figures. I don’t think I can argue with your fair value assessment of the company, but I also think my numbers are sound.

      As far as growth, most companies that pay out larger shares of profit in the form of dividends and hence have higher yields are likely to have lower growth profiles. You’ll very rarely see a yield of 6% with a growth rate of 7-10%. I would say tobacco companies are one of the few exceptions to this rule. And as far as the payout ratio, that’s not uncommon among REITs because they’re legally bound to pay out at least 90% of taxable income.

      At any rate, glad to be a fellow shareholder! :)

      Best wishes.

  8. says

    Great pick up. REITs have having a fire sale for the last few weeks. I should be getting more capital later this month and REITs are on my list of potential pick ups. But I’d probably go with OHI. I’ve already got a large position in O and an outstanding put against it, which may wind up getting assigned to me if the price doesn’t go up a bit more.

    • says

      MFIJ,

      REITs have definitely taken it on the chin. And I noticed that. I wasn’t particularly excited about them as they ran up and up until very recently my portfolio was REIT-free. But after the significant pullback and many of them entering fair value territory I thought it was an opportune time to pick up some high quality REITs and add a little income to the portfolio. We’ll see how it turns out.

      I like OHI. The demographics bode well for that company, and many others in healthcare.

      Best regards!

  9. says

    I really like this company although I’m not a shareholder. I think if I ever add another REIT, this company would be at the top of the list. It’s hard to argue with their track record and they are 1 of only a handful of REIT’s that actually increased their dividend during the Great Recession. If that doesn’t help you sleep well at night, I’m not sure what will.

    • says

      AAI,

      Great point. This company had a huge portfolio of real estate assets when the crash hit and other real estate investors were going under. O just kept on paying the dividend and lately have been raising it generously.

      Keep up the great work. You’re building that portfolio of yours into a monster. :)

      Cheers!

  10. gibor says

    In Canada if we hold US stocks in Registered account, we don’t pay dividend withholding tax, however, I’ve heard that on LMP and REITs we still should pay this tax.
    Is anyone knows how Realty Income Corp. (O) is considered?

    • says

      Gibor and DM:

      I am a Canadian who owns Realty Income (“O”) in my RRSP account for two months now. I have not had 15% withholding tax taken off and the dividends from O are treated the same as my dividends from Walgreens or McDonald’s, for example. On my 57 shares I receive $10.35 per month ($0.1815417 per share). The only different is that the $10.35 is in USA dollars which currently means i’m receiving about $10.60, which fluctuates given the rate of currency.

      Hope that clarifies Gibor.

    • says

      $25000,

      Thanks for stopping by and clarifying! I’m no expert on Canadian taxes, so it’s nice to hear from someone who’s a shareholder in Canada. Awesome info there. Appreciate you sharing. :)

      Best wishes.

    • gibor says

      Yes, thanks $25000, I emailed the same question to my discount brokareges in TD and CIBC and still didn’t get answer :)
      Agree that FX rate is bad,,,just wondering why I cannot put US$ dividends directly into my US MM fund

  11. Anonymous says

    On the topic of real estate, I was doing some calculations trying to decide whether to start a mortgage on a house or continue renting and dividend investing. Do you have any articles on that topic / would you consider writing one?

  12. says

    Hi Mantra!

    I can’t comment on the purchase for US REITs but I also added to a couple of REITs I own in Canada. As a side question, how many stocks do you feel you would own? You are getting up there in the numbers and I am curious if you have a ceiling?

    • says

      PIE,

      Thanks for stopping by! I hope all is well. :)

      I remember you writing an article about the maximum number of stocks not too long ago. I’m aiming for about 50. I think that gives me a good shot at mitigating income loss from dividend cuts/eliminations while also maximizing diversification across businesses and sectors. I have almost 40 companies in the Fund now, and I don’t even own great businesses like General Mills, Kimberly Clark or Exxon Mobil. There’s still a lot of companies I’d like to own a piece of, so I’m going to have to be quite choosy from here.

      Best regards.

    • gibor says

      I agree with you DM, many advocating holding just 20,10 or even 5 stocks… imho, more you have , less it will affect you if div cut happens… For Canadian it even more difficult as we wish to have good dividend stocks on both TSX and NYSE

  13. Anonymous says

    If you guys were to decide between ARCP and O? Which one? You’d definitely the price appreciateion for ARCP relative to O.

    Any thoughts?

    • says

      Anonymous,

      I own both, so that’s where I’m at with it. It’s like PEP vs. KO. I own both. I try not to choose sides, but rather enjoy multiple forms of quality and profit from all of them.

      Take care!

    • says

      I would go with realty. ARCP is a company that is too ambitious and too fast to grow. How will they perform during a recession? We already know how Realty has performed.

  14. Brandon says

    Just a question, doesn’t being a Reit mean that the dividends paid are not “qualified,” meaning they are taxed at regular tax rates instead of the preferred (or zero for the two lowest tax brackets) tax rate? Once retired and living off of dividend income only, this could make a big difference. Just wondering if anyone factors this into their decisions?

    • says

      Brandon,

      Right. REIT dividend income is considered ordinary income and is not qualified dividend income. However, I aim to only have 5-7% of my portfolio exposed to real estate this way. Also, my income in absolute numbers is going to be so low that income taxes in general won’t affect me too much for at least the first 10 years of financial independence (assuming no changes to tax policy as it stands).

      Best wishes!

    • says

      Aspenhawk,

      Thanks! I appreciate the support. You’ve been a very kind supporter of my journey. Thank you for that.

      I think having a long-term perspective is paramount to success if you’re trying to achieve something as grand as early retirement. I continue to stay determined because it’s something that I feel compelled to attain. I guess I just have some kind of drive inside me that doesn’t go away.

      I hope your journey is going well too!

      Take care.

  15. Anonymous says

    You will thank yourself for buying O Those CEOs would sell there Frist-Born before they cut the dividend. Monthly dividends are always nice

    • says

      Anonymous,

      Monthly dividends are indeed very nice. Speeds up the effect of compounding. :)

      I agree with you that O isn’t going to change the dividend policy anytime soon. Especially not after trademarking “The Monthly Dividend Company”!

      Best wishes.

  16. says

    Nice buy, DM. Way to average down (so much more fun than averaging up)! I learned of this REIT through your blog and am a big fan. Wishing you a super weekend!
    All the best,
    Ian

    • says

      Ian,

      Thanks! Appreciate the continued support so much.

      I’m lucky to be able to average down on positions like this. Keeping a long-term perspective is key, but when I see cheaper share prices I definitely rejoice.

      I wish you a great weekend as well! My weekend is starting out crummy because our a/c is down and our apartment is hitting 84 degrees right now.

      Cheers!

  17. Slight Edge says

    I have been looking at O as well, but I only have 8 stocks in my portfolio. I purchased HCP two months ago at 43. Yesterday I bought some CVX to help diversify my portfolio. I love the idea of that monthly dividend. Good luck with the purchase.

    • says

      Slight Edge,

      There was a time I only had 8 stocks in my portfolio as well. You’ll continue building and diversifying as time goes on. And you’ll find a comfort zone where you feel the diversification and risk mitigation is appropriate while still being able to actively manage it all. That’s just part of the fun. :)

      Good luck to you!

      Best regards.

  18. Anonymous says

    DM,
    Re taxes, I didn’t read your linked article yet, but wherever I read about their tax reporting in general in the past, the literature makes it sound very daunting. So, with regards to the O and your note “some of the dividends payouts can be considered nontaxable return of capital”, how would I distinguish the difference? If it’s the return of capital, this portion would be excluded from tax reporting I think, but my question is: Does a REIT (specifically O since I’ve also been eyeing it) send a 1099-DIV at the YE indicating the portion of capital return and NOT included in the box of ordinary divies or would I have to dig for more information in their financials, etc.? Tax reporting is probably the main reason why I’m hesitant of adding O to the list of my DGI portfolio because our individual stocks are in the taxable accounts. You invest in your taxable account as well, correct? If I’m not wrong I read your article why you chose taxable instead of deferred retirement accounts, I think. If so, have you tried to run a math to see how much ahead or behind you’ll be with O’s ordinary divies as compared to PM or some other high dividend utility stock (SO maybe?)paying qualified divies? This is also kind of a concern for me, but not paramount at all.

    Thank you.

    PS. I post as Anonymous because I don’t feel comfortable linking to my Google account. If not this choice, I wouldn’t be able to make comments at all, I suppose.

    • says

      Anonymous,

      No problem posting as Anonymous. There’s quite a few here that do as such.

      As far as the dividend distributions go, the companies publicize this information. For instance, O has that information here:

      http://www.realtyincome.com/pdfs/2012-common-stock-div-alloc.pdf

      As far as the comparison goes, I don’t think I’ll be further behind investing in high yielding REITs because the yield is high enough for the 15% cut to not hurt that much. Besides, my overall income will be very low once I’m FI. Also, it’s hard to compare O to PM because the yield spread is pretty significant and not all of O’s dividends will be taxed as ordinary income as discussed above. Also, it’s more than just the yield and the taxes at play. This type of investment gives me further diversification into real estate.

      I hope that helps. It’s tough for me to really go into lengthy discussions on taxes because we’re all in different situations.

      Best wishes.

  19. says

    Nice grab here! I’m eyeing TGT and BAX at the moment, it would be nice to see a dip soon.

    Can’t wait to see 2014 numbers with the recent batch of purchases. Do you know what your forward income level is at? I bet you’ll get over $5,000 in dividends next year.

    • says

      CI,

      Thanks!

      I like the watch list. I wouldn’t mind TGT either, but have focused more on WMT as far as retailers go. I’ll have to take a look at BAX sometime. It’s never been one I’ve looked at.

      Last I looked, my forward dividends were around $4,500. I think it’s quite possible to go over $5,000 in dividends next year. It depends a lot on how much I continue to purchase. I may have to slow my roll a little bit depending on whether or not certain events come to fruition next year. I’d definitely lover to eclipse $5k next year though. That would be awesome!

      Take care.

  20. Anonymous says

    Thanks for a great article again.

    I am not that familiar with REITs yet, have followed them a bit, but that’s why I would like to ask one question for you:

    If we would enter an era of increasing interest rates in near future, how do you seem them impacting share price of O? I have understood that in theory REIT prices fall down when interest rates start increasing, correct?

    Are you worried of this in today’s market environment, regarding O?

    • says

      Anonymous,

      Well, keep in mind that O has operated under much higher interest rates than we have today and they did well. Rising interest rates are a headwind to be sure, but that’s why I think it’s important to focus on the highest quality REITs with great underlying assets that should stay in demand. Also, I would buy in small lots and build positions over time. You can see that’s what I’m doing. I’ve avoided mREITs and have focused on equity REITs because they have great assets in demand. When it comes right down to it, rising interest rates won’t have a lot to do with many of the businesses locked into decade-long leases with O.

      Cheers!

    • says

      Anonymous,

      DLR has a particularly high short float, and I talked about that in my last article on them. That’s probably continuing to put downward pressure on shares. I continue to believe in the fundamentals of the business, so if I didn’t already purchase two lots and have a comfortable position size with the company I would buy here.

      Best of luck!

      Take care.

  21. Anonymous says

    I am thinking about KMI as well.its taking a hit lately and might be a good entry point.
    Anybody can elaborate about why KMI is taking a hit?

    • says

      Anonymous,

      KMI has been targeted by a hedge fund – Hedgeye Risk Management. They are releasing a report on Tuesday that is supposed to detail how Kinder Morgan is a “house of cards”. They have stated that shorting Kinder Morgan is their “best idea”. We’ll see what the report says, but I’m not really concerned.

      Best wishes.

  22. Anonymous says

    can’t trust Hedgefund guys. They think short term, we think long term and look for single and doubles while hedgefund guys try to beat the S&P and hit triples and home runs…… so this report could be great for us!….as long as we drown out the noise!
    -Jersey Jerry

    • says

      Jersey Jerry,

      I agree with you. Can’t really trust anyone with an agenda, and hedge funds are a prime example of that.

      I look forward to seeing what the report on Tuesday says. I certainly can’t evaluate every part of the Kinder Morgan business structure, but I can’t see anything that worries me. If the report is light on facts and heavy on opinions I’ll be glad to buy more KMI if the stock is punished.

      Take care!

  23. Anonymous says

    Hi,

    I am new to considering investing in REITs. I see from various investing websites that quite a few REITs have a track record of growing dividend payouts maintained over considerable number of years and are reliable. The required 90% payout is a black and white rule. The Income Statement for a REIT, due to nature of the business, is as straight forward and understandable for simple investors like myself as any industry out there. However, I have a concern that is bothering me about REITs that maybe has been addressed before or hopefully someone who has considered this concern before and proceeded to invest can share with me their reasoning that overcame this concern.

    Here it is: taking the average Cash from Operations for the last 4 years (2009-12) and subtracting the average Dividends Paid and average Cash Interest Paid I get a negative amount ($54million). I used the last 4 years only since that was as far back as Google Finance spits out. The concern is O has in effect had to finance their dividend payouts over the past 4 years by issuing additional stock and/or debt. To cover their Payout with Operational Cashflow the Payout would have to be reduced by 23% which in turn would reduce the yield by similar %.

    Is my concern valid? Is the sample of data not representative? Would this reduced yield still leave O as an attractive investment?

    O is not a fly-by-night company, its legitimate, the assets are real, its been operating for years. What am I missing?

    Thanks in advance for any feedback.

    • says

      Anonymous,

      I’m not familiar with the term “Cash from Operations” in relation to REITs. REIT profitability and valuation is generally determined from FFO or AFFO (Funds From Operations or Adjusted Funds From Operations). If this is what you’re referring to, FFO excludes depreciation as a non-cash charge. The same is with amortization, as FFO adds depreciation and amortization expenses back to earnings.

      I would recommend you go back over the FFO for the last few years for O and look at the dividends paid and see what you find.

      Best regards!

    • Anonymous says

      Hi,

      These are the standard accounting terminology from the 10-K’s O files with SEC. The figures used were from Google Finance but, looking at the 10-K, the Google figures agree. The only one I cannot find is Cash Interest Paid but since the Interest Expense reported on the 10-K is higher than the Cash Interest Paid number then I think it is reasonable.

      So still am at a loss to see what I am missing. The implication is if O stopped issuing new stock and debt then the dividend payout would have to drop or they would run out of cash eventually or have to start selling assets.

      One thing not taken into account on the financials is the appreciation of the assets held by O which am assuming could be significant. But I would feel more comfortable about O if the cash generated by their rents was enough to cover their obligations but again, maybe I am missing something.

      thanks

    • says

      Anonymous,

      REITs typically issue new shares and debt to fund acquisitions, of which O has been quite active in (especially lately). The dividend is funded by their ability to create profit from those acquisitions – namely through rent and rent increases as well as the spread between their cost of capital and the yield, or earnings on that capital. REITs aren’t for everyone, and perhaps you have identified ways in which these investments do not suit your personal risk tolerance or investment style.

      Best of luck to you.

      Cheers!

  24. Anonymous says

    I’m looking to make an entry on either O or ARCP next month. If you had to choose between the 2 of them at their current prices, which one would you buy?

    • says

      Anonymous,

      Tough call there. ARCP is cheaper, with a higher yield. However, the operational history is short. I would pick O only because it’s the safer pick. If I could own both, I would (as I do now). But if I had to pick only one, it would be O because of an excellent operational history and proven track record.

      I hope that helps!

      Best wishes.

  25. Anonymous says

    I’m looking at REIT closely but have not pulled a trigger yet.
    As you are aware, they are very sensitive to interest rates and look at 5 yr charts and I think they still have some beating to take.

    I will wait till “O” reaches mid 30′s (>6% yield)
    Lets see..

    • says

      Anonymous,

      I have no ability to predict macroeconomic events, so interest rate swings are beyond me. However, I’m aware they are on the rise and REITs may continue to get punished. I never really time my purchases like that. I just look for an attractive long-term price and buy in, building my ownership position and reinvesting my share of the profits (dividends) along the way.

      If O drops to the 6% yield mark I’ll likely just buy more! :)

      Take care.

  26. Anonymous says

    I’m missing something with REIT’s analysis.. They have payout ratio of well above 100%. “O” has 216% from yahoo finance.. I understand that REIT’s should payout 90% of their income to qualify as a REIT but how can they payout more than 100% ?? how can they maintain that kind of a payout ratio… don’t get it !! help me understand..

    • says

      Anonymous,

      REITs can pay out more than 100% of net income because of the fact that REITs typically have large depreciation and amortization expenses, which can affect net income but depreciation is a non-cash charge and doesn’t reflect the ability for a REIT to pay out a cash dividend. To asses the profitability of a REIT you should use FFO or AFFO, which add back in depreciation and amortization expenses to earnings as non-cash charges.

      I hope that helps!

      Best regards.

  27. says

    I have a REIT (ARR.UN) that is essentially to generate long term income and industrial focused. The beating allow some cost averaging down.
    Nothing much to say, I avoid the noise as usual and will go out if the company itself isn’t anymore on an acceptable track for me.

    Keep it investing!

    • says

      JF Baconnet,

      Great job avoiding the noise and focusing on long-term fundamentals. That’s the name of the game! :)

      Keep up the great work. Hopefully that income can keep building your snowball ever bigger!

      Take care.

  28. Onassis says

    Hi Jason,
    I have a short question:

    In 2012 O have paid a dividend from 1.772 USD.
    But the earnings per share was only 0.76 USD.

    Is that not a reason, for selling and not for buying?

    Best regards! :-)
    Onassis from Germany

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