Is Realty Income a Buy, Sell, or Hold in 2025?

Realty Income (O) is known as a dependable dividend stock for steady, long-term investors. As one of the largest real estate investment trusts (REITs) globally, it stands out for offering monthly dividends and has a history of increasing its payouts 127 times since its initial public offering in 1994.

In the past three decades, Realty Income has shown impressive performance by achieving a total return of 4,960% when reinvested dividends are included. This remarkable growth far exceeds the S&P 500, which recorded a total return of 2,030% during the same period. As we look towards 2025, the question arises: should investors buy, sell, or hold this prominent REIT stock?

The Key Facts and Figures

Realty Income operates by purchasing commercial properties, leasing them out, and distributing most of the rental income to its investors in the form of dividends. To keep a favorable tax situation, U.S. REITs are mandated to pay out at least 90% of their taxable income as dividends.

When evaluating a REIT, it is essential to examine the growth of total properties, occupancy rates, and adjusted funds from operations (AFFO) per share, which provide a more accurate picture of the REIT's profitability than earnings per share (EPS). In Realty Income's case, all three metrics have shown consistent growth.

Metric	2021	2022	2023	1H 2024
Total Properties	11,136	12,237	13,458	15,450
Occupancy Rate	98.5%	99%	98.6%	98.8%
AFFO per Share	$3.59	$3.92	$4.00	$2.09

Additionally, Realty Income merged with Spirit Realty Capital, a smaller competitor, in January 2024, which added 2,037 properties to its portfolio, further strengthening its market position.

Reasons to Sell or Avoid Realty Income

While Realty Income's business appears robust, there are concerns that some investors express. Elevated interest rates and difficulties faced by some of its key tenants are of particular importance.

The Federal Reserve has recently cut its benchmark interest rate for the first time in four years as of September, but future rate cuts may occur slowly if inflation remains high. If interest rates stay elevated, REITs may lose some of their appeal for two main reasons. First, higher interest rates can raise the costs of acquiring new properties. Second, the allure of risk-free CDs and T-bills can overshadow the benefits offered by REITs and other dividend stocks.

Another significant concern involves two of Realty Income's largest tenants: Walgreens and Dollar Tree. As of the end of the second quarter in 2024, Walgreens contributed to 3.3% of Realty Income's annualized rent and announced plans to close 1,200 stores over the next three years. In a similar vein, Dollar Tree represented 3.1% of the annualized rent and plans to shut down approximately 1,000 stores in the coming years. Additionally, some smaller tenants like CVS, AMC, and Red Lobster are also reducing their physical locations.

Reasons to Buy and Hold Realty Income

Supporters of Realty Income feel that concerns regarding the company are overstated, emphasizing the attractiveness of its dividend and the relatively low stock price. The current yield of the 10-year Treasury at 4.4% is less appealing compared to Realty Income's forward yield of 5.4%. Moreover, market analysts anticipate that the Federal Reserve may implement several interest rate cuts within the next year. Should this trend continue, Realty Income and similar REITs would likely become more appealing than CDs, T-bills, and other fixed-income options.

As for its less robust tenants, Realty Income has time on its side as these leases will expire in the coming years. This situation allows the company to replace them with new, more profitable tenants. Stronger companies like Dollar General and Walmart are among those that may help counterbalance the impact of weaker tenants, as they continue to expand their store presence.

Realty Income further benefits from a diverse base of over 1,500 tenants across 90 different industries. The company's occupancy rate has remained above 96% since its IPO, ensuring a stable long-term outlook that can help mitigate short-term challenges.

The stock price of Realty Income has already surged by over 20% in the last year, buoyed by expectations of future rate reductions. However, at around $60, the stock appears relatively undervalued, trading at 15 times last year’s AFFO per share. This favorable combination of low valuation and high yield suggests lower downside risks, making it a solid choice for income-focused investors.

Is It the Right Time to Buy, Sell, or Hold Realty Income Stock?

Realty Income may not represent an exciting growth opportunity, but retaining the stock currently seems wiser than selling. Investors should remain vigilant regarding interest rates and the financial health of its main tenants, but its apparent strengths are likely to outweigh these minor drawbacks.

Realty, Income, Investment