Magnificent High-Yield Dividend Stock Down 29% to Buy and Hold Forever

If you're an income investor looking for a high-yield dividend stock that's down but not out, Realty Income (O -0.74%) might be just the ticket. This Dividend Achiever has been paying and raising its monthly dividend for over three decades, and its current yield of 5.5% is nothing to sneeze at. But why has this magnificent stock fallen by nearly 30% from its peak in early 2024, and is it still a buy-and-hold forever candidate?



The decline in Realty Income's stock price can be attributed to several temporary factors:

1. Interest rate hikes and yield curve inversion: Realty Income, like other REITs, is sensitive to interest rate changes. The Federal Reserve's aggressive rate hikes in 2022 and early 2023 led to a yield curve inversion, which typically indicates an impending recession. This inversion caused investors to sell off REITs, including Realty Income, in favor of safer investments like bonds. However, as the Fed has since cut rates and the yield curve has normalized, this factor is likely to be temporary.
2. Concerns about retail sector performance: Realty Income's portfolio consists primarily of retail properties, which have been facing headwinds due to e-commerce competition and changing consumer preferences. However, the company's occupancy rate remains high (98.7% as of Q3 2024), and it focuses on serving the retail market's biggest players, which are better equipped to weather these challenges. As the retail sector stabilizes, this concern is likely to subside.
3. Market sentiment and sector rotation: Realty Income's high dividend yield (currently around 5.5%) makes it an attractive target for income-oriented investors. However, when market sentiment shifts and investors rotate out of high-yield stocks in favor of growth stocks, Realty Income's share price can suffer. As market sentiment shifts back towards income-oriented investments, this factor is likely to be temporary.
4. Acquisition-related concerns: In 2023, Realty Income acquired Spirit Realty Capital in a $9.3 billion deal. While this acquisition was expected to add 2.5% to the company's adjusted funds from operations (FFO), some investors have expressed concerns about the integration process and the potential impact on the company's financial performance. As the integration progresses and the benefits of the acquisition become apparent, these concerns are likely to dissipate.

Despite these temporary setbacks, Realty Income remains an attractive long-term investment for several reasons:

1. Strong dividend track record: Realty Income has increased its monthly dividend for over 30 years, and its current yield of 5.5% is well above the S&P 500's current yield of 1.3%.
2. Resilient business model: Realty Income's focus on serving the retail market's biggest players has helped it maintain a high occupancy rate and stable cash flow, even in the face of e-commerce competition.
3. Attractive valuation: Realty Income's forward P/E ratio of around 18 is in line with its historical averages and industry peers, suggesting that the stock is not overvalued at its current price.

In conclusion, Realty Income's recent decline is likely due to temporary factors, and the stock remains an attractive long-term investment for income-oriented investors. Its strong dividend track record, resilient business model, and attractive valuation make it a buy-and-hold forever candidate. As the company continues to raise its dividend and grow its portfolio, income investors can expect to benefit from its long-term success.