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.
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.
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