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Best of the Best Monthly Dividend Stocks: Realty Income Corp (O) (The Monthly Dividend Company)

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I recently published an article entitled “The Best Monthly Dividend Stocks” where I evaluated 17 C-corporation stocks that pay dividends monthly.

In that previous article I covered the benefits of monthly dividends and provided the reader with a red/yellow/green recommendation on investment potential and a brief rationale for the recommendation on each of the 17 stocks.

To provide more granularity on those stocks ranked green in the previous article, I’m covering in more detail the four stocks I consider “The Best of the Best Monthly Dividend Stocks”. I previously covered:

– STAG Industrial (STAG)

– Chatham Lodging Trust (CLDT)

– LTC Properties  (LTC)

in the first, second, and third articles of this series. This latest article covers the fourth and last stock in the series, Realty Income Corp (NYSE:O).

Let’s start with an analysis of how hedge funds were trading Realty Income Corp in the first quarter. 14 hedge funds tracked by Insider Monkey were long the stock on March 31, owning a mere 0.80% of its shares. There was some investment in the stock during the first quarter however, as a net total of 3 more funds were long the stock, while the aggregate value of funds’ holdings swelled by 73% to $128.68 million. Cliff Asness’ AQR Capital Management upped its stake in Realty Income Corp by 17% during the first quarter, to 113,382 shares.

Introduction To Realty Income, Inc.

In the spirit of providing currently actionable investment recommendations, I chose to cover the four “Best of the Best” monthly paying stocks in order of most undervalued to least undervalued.

Many investors view the REIT sector as a fairly uniform group of companies (trusts) that own property or make loans on property with the investor focusing on the highest yield in the sector. This approach to primarily looking at a REIT’s yield is a mistake. All REITs are not created equal and equity REITs and mortgage REITs are as different as apples and oranges.

When selecting a REIT for investment, it is important to interpret dividend yield through a qualitative (versus strictly quantitative) lens looking at the underlying risk adjusted performance to ensure the overall metrics such as the balance sheet, diversification, earnings growth, and payout ratios support continued growth of the REIT and its dividend. Consistent with this approach, the investment thesis for Realty Income is laid out in the following paragraphs and charts.

Realty Income is an internally managed REIT which invests primarily in retail and light industrial spaces with a small exposure in agricultural properties and office space. The majority of Realty Income’s properties are in the retail space with broad diversification within that sector. The chart below provides a snapshot of Realty Income’s top 20 tenants.

Realty Income Top 20 Customers

Source:  Realty Income Website

The largest tenant in Realty Income’s stable is Walgreens Boots Alliance Inc (NASDAQ:WBA) with a 6.8% contribution to total revenue. This level of diversification effectively prevents Realty Income from suffering significant impact to revenue and earnings if one tenant has financial difficulties. The other point to note from this chart is that 8 of the top 20 tenants maintain an investment grade credit rating.

In addition to tenant diversification, Realty Income also maintains effective industry diversification as shown in the chart below.

Realty Income Industry Diversification

Source:  Realty Income Website

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