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

Updated: 05-11-2024, 01.24 PM

Realty Income (NYSE: O) is often considered a reliable dividend stock for long-term investors. It’s one of the world’s largest real estate investment trusts (REITs), it pays monthly dividends, and it’s raised its payout 127 times since its IPO in 1994.

Over the past 30 years, Realty Income generated a total return of 4,960% with reinvested dividends, which easily beat the S&P 500‘s total return of 2,030%. But as 2025 approaches, should investors buy, sell, or hold this leading REIT stock?

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Three people talking in an office. — Image source: Getty Images.

Retail REITs like Realty Income buy up commercial properties, rent them out, and distribute most of that rental income to their investors as dividends. To maintain a favorable tax rate, U.S. REITs need to pay out at least 90% of their taxable income as dividends.

To analyze a REIT, we should review their growth in total properties, occupancy rates, and adjusted funds from operations (AFFO) per share — which more accurately gauges a REIT’s profitability than its earnings per share (EPS). At Realty Income, all three metrics have been growing at a steady rate.

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

Data source: Realty Income.

Realty Income also merged with its smaller competitor, Spirit Realty Capital, in January 2024. That all-stock merger added 2,037 properties to its portfolio.

Realty Income’s business looks rock solid, but the bears don’t like it because interest rates are still elevated and some of its top tenants are stumbling.

The Federal Reserve finally cut its benchmark interest rate for the first time in four years in September, but it might slow down its future rate cuts if it fails to tame inflation. If that happens, REITs will lose their luster for two simple reasons. First, high interest rates will make it more expensive to purchase new properties. Second, elevated rates will make risk-free CDs and T-bills more attractive than REITs and other dividend stocks.

The other major issue is that two of Realty Income’s biggest tenants — Walgreens (NASDAQ: WBA) and Dollar Tree (NASDAQ: DLTR) — are struggling. Walgreens, which accounted for 3.3% of Realty Income’s annualized rent at the end of the second quarter of 2024, plans to shut 1,200 stores over the next three years. Dollar Tree, which accounted for 3.1% of its annualized rent, will close about 1,000 stores over the next few years. Some of Realty Income’s smaller tenants — including CVS, AMC, and Red Lobster — are also closing many of their brick-and-mortar locations.

The bulls believe those concerns are overblown, that Realty Income’s dividend is attractive, and that its stock still looks cheap. The 10-year Treasury’s yield of 4.4% is already much lower than Realty Income’s forward yield of 5.4%, and the Fed is still widely expected to cut interest rates several times over the next year. If that trend continues, Realty Income and other REITs will become much more attractive than CDs, T-bills, and other fixed-income investments.

As for its weaker tenants, those leases will gradually expire over the next few years, so it still has plenty of time to bring in new tenants. Many of Realty’s stronger tenants — including Dollar General (NYSE: DG) and Walmart (NYSE: WMT) — could also offset that pressure as they continue to open new stores.

Realty Income also serves more than 1,500 tenants across 90 different industries, and its occupancy rate has never dipped below 96% since its IPO. That scale and diversification should address those near-term concerns and help generate steady long-term returns.

Realty Income’s stock has already rallied more than 20% over the past 12 months in anticipation of more rate cuts. But at $60, it still looks cheap at 15 times last year’s AFFO per share. Its low valuation and high yield should limit its downside potential and make it a safe investment for income investors.

Realty Income isn’t an exciting growth stock. But buying and holding this REIT right now makes a lot more sense than selling it. Investors should certainly keep an eye on interest rates and the health of its top tenants, but its obvious strengths will likely outweigh those minor weaknesses.

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Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

Is Realty Income a Buy, Sell, or Hold in 2025? was originally published by The Motley Fool