4 Things to Know Before Buying Real Estate Income Stocks

Diversification within a portfolio can provide investors with some downside protection against a downturn in an entire sector of the stock market. While consumer and technology stocks make headlines because of their well-known brands and exciting growth stories, investing in real estate can also help diversify a portfolio.

Some investors prefer to gain exposure to real estate by purchasing investment properties, but for those who are not interested in owning real estate, there are ways to benefit from a real estate ownership niche in the equity portfolio.Realty Income (NYSE: O)It is a company that investors should consider. However, there are four things to know about Realty Income before making an investment decision to add it to your portfolio.

1. it is a "monthly dividend company"

Many companies pay monthly dividends, but Realty Income calls itself a "monthly dividend company" right in the company's tagline. It's more than just a slogan, however, as Realty Income has increased its dividend for 29 consecutive years, showing investors that the company is serious about returning capital to shareholders.

Dividends can have a huge impact on a shareholder's return. For example, if 1,000 shares of stock were purchased for $37,330 in 2013, they would be worth $57,420 at the end of 2023 if only price appreciation is taken into account over that period. If dividends are included, that adds another $28,430 to the bottom line.

2. Real Estate Income Corporation is a real estate investment trust company

One of the reasons Realty Income makes such a big deal about its monthly dividends is that it is a real estate investment trust (REIT). This classification means that Realty Income must distribute at least 90% of taxable income to shareholders as a dividend.

This distribution requirement provides investors with more certainty that dividends will continue. While this is true, there may be occasions when distributions are suspended (as was the case with some of Realty Income's peers during the Pandemic), on balance, REITs can be relied upon to generate income from distributions.

3. Potential growth momentum in the coming years

Interest rate increases affect every industry. For companies like Realty Income, the next few years could be beneficial. Many companies are currently paying off their debt at very low interest rates. The next time these companies need to enter the debt market, the rates will be much higher. This increases the attractiveness of a type of sale known as a leaseback transaction.

Simply put, a sale-and-release transaction is one in which a company sells its property and then leases it from the buyer, a win-win situation for both Realty Income and the potential partner. This is a win-win situation for both Realty Income and the potential carrier, as Realty Income can acquire and lease back the new property, while the seller of the property receives additional balance sheet capital from the transaction.

4. Realty Income has a diversified portfolio of carries

For a company like Realty Income, a severe recession could be a potential risk. If a client's business declines and they are unable to pay their rent, Realty Income will feel the impact.

In response, the company diversified its portfolio of carriers in order to remain stable in the event of a recession. In fact, Realty Income's 29% properties are all car-carrying stores, convenience stores, and dollar stores. While these industries will certainly be affected by an economic slowdown, they should be more resilient to risk than discretionary industries such as entertainment. Realty Income estimates that its aggregate rents of 89% will be able to withstand an economic downturn.

In addition, Realty Income is diversifying internationally - 13% of its rents come from the UK, and since 2019, the company has invested approximately $10 billion in real estate in Western Europe. Including the UK, 15% of the total annual rental value is from Western Europe.

So, is Realty Income worth buying?

For many investors, finding a quality REIT is the easiest way to gain exposure to real estate in an investment portfolio. Realty Income is an attractive option when considering a REIT. The company has a long track record of success (an average annualized compound郃 return of 14% since its IPO) and it is committed to increasing its dividend, which means that the value of shareholders' holdings can be expected to grow over time.

Should you invest $1,000 in Realty Income now?

Before buying shares of Realty Income, consider the following:

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Jeff Santoro does not own any of the stocks listed above.The Motley Fool holds a recommendation for Realty Income.The Motley Fool has a disclosure policy.

4 Things to Know Before Buying Realty Income Stock was originally published by The Motley Fool.