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Is This 4.05% Dividend Stock A Buy?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I to want help you figure this out by answering – Is This 4.05% Dividend Stock A Buy?

Realty Income (O) – is a real estate investment trust (REIT) pronounced REET – that owns 6,600 retail, industrial, manufacturing and distribution, and office properties in 49 states and Puerto Rico.

What is a REIT?

By law, REITs are investment companies that own and operate properties that get special tax advantages that help save them money.  And this allows them to grow fast if the right managers are in charge.

In exchange for these special tax advantages by law, REIT’s must pay out 90% of all profits to shareholders in the form of dividends.

These make REIT’s great income plays most of the time.  And dividend income helps sustain and grow your retirement portfolio safely no matter the economic situation.

The only exclusion to this is REIT’s that were hard hit by Covid closures, delayed rent payments, etc.

Realty Income is so powerful that its revenues, profits, and cash flows did not fall in 2020 while most other real estate-based companies did… It grew revenues, profits, and cash flows.

Because of this its stock shot up 63.2% since its 2020 low on March 18th during the height of the Covid panic.

However, since January 1st, 2020 its stock is down 4.3% even with revenues, profits, and cash flow rising.

But this is all in the past…

Now that the economic and unemployment situations seem to be getting better… I want to answer if Realty Income is a buy now. 

It’s based in San Diego California.  It has a $25.9 billion market cap. And it pays you a rare monthly dividend that comes out to an annual 4.05% basis. Which is reason #1 to consider buying its stock.

Realty Income’s 4.05% Dividend

In the last decade, Realty Income’s paid out a total of $23.24 per share in dividends.

At today’s share count of 345 million shares that’s equal to $8.018 billion paid out to shareholders in that time.

Plus, it grew its dividend 60.9% from $1.74 per share in 2011 to $2.80 per share now.  

These dividend payments help you earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

On top of this it’s one of only 53 dividend stocks on Earth that pay a monthly dividend.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

One thing I don’t like about Realty Income’s dividend though is much of it isn’t paid from operating profits or cash flow… It’s paid from issuing new shares and diluting shareholders.

Think of share dilution like inflation.

The more shares a company issues the lower the value of the profits and cash flows per share go because there are more shares that own the same profits.

This is like a pizza.

If you get one pizza – one share – you own the whole pizza yourself.

But if there are 10 people – 10 shares – now you only get one tenth of the pizza.

Share dilution works the same way but on a far larger scale.

How much in this case?

Realty Income now has 345 million shares.  In 2011 it had 126 million shares.

Meaning, that if you owned shares in 2011 until now those shares are now worth 174% less than they were in 2011.

This large amount of dilution usually causes share prices to crater… But that hasn’t happened to Realty Income because it invests its capital well.  And it continues to grow profits and cash flows.

Which is reason #2 to consider buying Realty Income stock.

Realty Income Earns Large Profits

Between 2011 and 2019 Realty Income earned an average operating income margin of 51.1% per year.

I look for anything above 10% on a consistent basis so this is great.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Between 2011 and 2019 this averaged 69.6% per year.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

The FCF/Sales is so high – and higher even than operating profits – due to the share dilution.

But even stripping that out and Realty Income’s earned cash flow from operations (CFFO) – this is a way to analyze REIT’s – between $800 million and $1.12 billion every year since 2016.

In each year this amount alone was more than enough to cover the dividends.

This means the share dilution is more for growth and reinvesting in the company.

And this takes a lot of the potential issues of share dilution away.  Its still not great.  But if Realty continues to allocate capital well and invest in high quality cash flow producing assets its not a huge problem.

What about its debt levels?

Realty Income Has Low Enough Debt

As of this writing O has $340 million in cash compared to $8 billion in debt.

As a percentage of its balance sheet total liabilities make up only 42.6%. 

Debt makes up only 30.9% of its market cap.

And its debt-to-equity ratio is 0.81.

These all well below the minimum thresholds I look for… As one example, I look for debt to equity ratios to be below 1.

This gives you a large margin of safety to potentially buying Realty stock… Especially when you consider its large and consistently great profit and cash flow production.

But before we get to that is it even cheap enough to buy?

Realty Income IS NOT Cheap…

With the markets at or near all-time highs you’d expect what was a great stock like Realty be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 60.8.

Its P/CF is 21.5.

Its forward P/E is 48.5.

And its enterprise value to operating income – EV/EBIT is 48.5.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that Realty Income is massively overvalued right now.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also tr

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Realty Income being overvalued right now, its stock doesn’t give you a large margin of safety.  This makes buying it extremely risky and it also means you should expect to earn lower returns going forward on Realty if you were to buy now.

For these reasons I recommend you avoid Realty Income and wait until its cheap enough to buy.


If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in Realty Income… But only when its cheaper.

In the meantime, consider investing in one of the great stocks below.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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