Last year was another challenging one for the commercial real estate sector. Although the Federal Reserve has begun to cut interest rates, it has not cut them as quickly as the market expected due to stubbornly high inflation. Higher rates have acted as a tailwind for the sector, affecting property values and the ability of property investors to borrow money to fund new real estate deals.
As a result, the average real estate investment trust (REIT) made a modest return last year. The S&P US REIT Index he got only 4.3%, failing significantly S&P 500‘with 25% of the total return.
Despite the poor performance of the sector in recent years, REITs have outperformed stocks over the long term. This is one of many reasons why did i keep buying multiple shares of several REITs over the past few years. I plan to continue doing so in 2025. My top REIT to buy this year is Income from real estate(NYSE: O). He has been an incredible passive income producer over the years, which has added to his strength total returns long term. They are some of the many reasons whyI think it is the best REIT to buy this year.
Realty Income has been an income generating machine for years. The REIT has paid 654 consecutive monthly dividends. It has increased its payout 128 times since it went public in 1994, which includes the last 109 consecutive quarters. All in all, Realty Income has achieved 30 consecutive annual increases in its dividend. It increased its payout at an annual rate of 4.2% during that period.
That growing stream of dividend income has really added up over the years. For example, an investor who bought 100 shares of Realty Income in late 2013 would have invested $3,730 in the stock. They would receive a cumulative $3,077 in dividends by the end of the third quarter. That’s an 82% return on their original investment something more than a decade. Meanwhile, their current annual dividend income would be $308, up 40% from $219 of income from dividends that they would collect in the first year. Their yield on cost rose from 5.9% when they originally bought the stock to 8.2%.
Income from real estate dividend yield it is currently over 6%, partly because of to approximately 18% decline in the share price compared to its recent peak. That high-yield payout ( S&P 500 dividend yield around 1.2%) is on a very sustainable basis. The REIT has a conservative dividend payout ratio (around 75% of its adjusted business funds). It also has one of the strongest balance sheets in the REIT sector (it is one of eight REITs with two A3/A- credit ratings or better). These factors give it significant financial flexibility to continue paying dividends.
Realty Income has grown into the seventh largest global REIT. It owns about 58 billion dollars of commercial real estate in eight countries (USA and Europe). Its portfolio includes retail (79.4% of its annual base rent), industrial (14.6%), casinos (3.2%) and other properties such as data centers (2.8%) leased many of the world’s leading companies.
Although already one of the largest REITs, Realty Income owns a tiny slice of the overall market opportunity for net rent real estate. The value of the opportunity is estimated at $5.4 trillion in the US and $8.5 trillion in Europe.
Realty Income has increased its ability to capitalize on this tremendous opportunity by increasing its scale and expanding into new investment verticals. For example, it has invested in the development of data centers and casino assets in recent yearsadding $700 billion to its US market opportunity. In the meantime, it has expanded into several additional European countries, increasing its opportunities set for 5.9 trillion dollars. It also added a credit investment platform and it is launch of a platform for managing private capital funds. Tapping into the private equity market opens the door to potential investors worth $18.8 trillion.
The REIT has the financial strength and opportunity to continue growing at a solid rate. It has grown its adjusted funds from operations per share at a 5% compound annual rate since 1995 (and at an even faster pace of 6% since 2012, driven by its larger operations). Given his financial flexibility, market opportunities and recently launched private equity management business, he should be able continue to grow at roughly a mid-single digit rate going forward.
This growth created additional value for investors. Add that to the income stream and Realty Income has averaged a 14.1% annual total return since its 1994 IPO.
Realty Income has been a phenomenal investment over the long term. It is currently offering investors very attractive yield and value proposition. That’s why it’s my top pick in the sector to buy this year for those looking for passive income. It should provide steady income growth with the potential to deliver above-average total returns over the long term.
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