Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Realty Income Dividends Hold Up When Rates Stay Flat
Transcript
- Lucas: So the Fed has kept rates flat at three point six three percent since June, the ten-year yield is sitting at four point five five, and the two-year actually ticked up a hair to four point one eight. The spread is widening again, but barely — thirty-nine basis points. That's a pretty sleepy rate environment. Luna: Sleepy for the macro, but some dividend stocks are waking up. Realty Income — ticker O — is up two point two percent in the last five days. That's a nice move for a low-beta REIT. Lucas: Yeah, and I think O is a really interesting case study right now. Because the conventional wisdom is that REITs get crushed when rates are high or rising. But here we are, rates flat to slightly elevated, and O is trading at sixty-five eighteen. That's not far from its fifty-two-week high. Luna: Right, and the yield is still around five and a half percent. That's competitive with a lot of bonds, but with a growth trajectory attached. Lucas: Exactly. And you know, this is exactly the kind of conversation where I think listener support makes a real difference. This show stays ad-free because people who find value in it chip in at buy me a coffee dot com slash fexingo. It's a small thing that keeps us independent. Luna: Yeah, it's how we keep digging into these specific cases without worrying about commercial breaks. So back to O — let's talk about what makes its dividend different. Lucas: The key metric for a REIT isn't earnings per share — it's adjusted funds from operations, or AFFO. Realty Income pays out virtually all of its AFFO as dividends. In the most recent quarter, their AFFO per share was about one-oh-one, and the dividend was one-oh-one. That's a one hundred percent payout ratio. Luna: Which sounds scary if you think of it like a regular company. But for a triple-net lease REIT, it's actually normal. The tenant pays property taxes, insurance, maintenance — O just collects the check. Lucas: Right. Their occupancy rate has been above ninety-eight percent for years. And their top tenants are investment-grade — Walgreens, Dollar General, 7-Eleven. The rent comes in like clockwork. So when rates are flat, their cost of capital is predictable, and their acquisitions — they're still buying properties — can be financed at known rates. Luna: Compare that to a company like Verizon. VZ is up two point four percent over the same five days, but their dividend is funded by cash flow from a competitive, capital-intensive business. O's model is simpler. Lucas: And that's why O's beta is so low. It's around zero point seven. When the S&P drops one point three percent in a week, like it just did, O is up. That's the opposite of correlation. For income investors who can't stomach volatility, that's attractive. Luna: But what about the risk that rates eventually rise? If the ten-year goes to five percent, doesn't that hit O hard? Lucas: It does in the short term — higher rates mean higher cap rates on new properties, which can compress valuations. But O has a track record of raising its dividend for over fifty quarters straight. They've managed through rising rate environments before. The key is that their leases have built-in rent escalators — typically one to two percent annually. So their revenue grows even if the economy slows. Luna: And their debt is mostly fixed-rate, long-duration. I think the average maturity is around seven years. So a gradual rise in rates doesn't immediately spike their interest costs. Lucas: Exactly. Their weighted average interest rate is around three point eight percent. That's well below the current ten-year. So they're actually borrowing at a discount to the risk-free rate, which is unusual. That gives them a cushion. Luna: So the flat rate environment we're in right now — the Fed holding at three sixty-three, the yield curve still inverted but barely — that's actually kind of a sweet spot for O. Low refinancing risk, stable cap rates, predictable income. Lucas: And the monthly dividend is a psychological advantage too. For someone living off their portfolio, getting a check every month instead of quarterly is easier to budget. O is one of the few stocks that pays monthly. Luna: Yeah, and that's been a big part of their pitch. They call themselves 'The Monthly Dividend Company'. And they've increased that dividend a hundred and twenty-seven times since listing. Lucas: So the question for a dividend investor today is: do you want yield that's stable, growing slowly, with low volatility? Or do you want higher current yield with more risk? O gives you the former. Altria — MO — is up six point four percent this week, but that's a different risk profile entirely. Luna: Right, MO is a whole other conversation. Tobacco has regulatory risk, declining volumes, but massive pricing power. O's risk is more about the real estate cycle and interest rates. Lucas: And occupancy. If a big tenant like Walgreens starts closing stores, that could hit O. But Walgreens is only about two percent of their rent. Their portfolio is incredibly diversified — over fifteen hundred properties across the US, UK, and Europe. Luna: So the takeaway for today might be: in a flat rate environment, a well-managed net-lease REIT can be a core holding for income. It's not going to double your money, but it will keep paying you while you sleep. Lucas: And if you're reinvesting those dividends, the compounding adds up. O's total return over the last decade has actually beaten the S&P, thanks to that steady income plus modest appreciation. Luna: But you have to be comfortable with the REIT structure — the dividends are taxed as ordinary income, not qualified dividends. So tax efficiency matters if you're holding in a taxable account. Lucas: Good point. In an IRA or 401k, that's not an issue. And for many income investors, the monthly cash flow is worth the tax treatment. Luna: So what's the one thing you'd want listeners to remember about O this week? Lucas: That a five and a half percent yield from a triple-net REIT with ninety-eight percent occupancy, a hundred-plus quarters of dividend growth, and low correlation to the market is a rare combo. In a flat rate world, it's worth a closer look. Luna: Alright, that's a solid angle. Thanks Lucas. Lucas: Thanks Luna. And for those who want to support the show, the link is buy me a coffee dot com slash fexingo. Every bit helps keep these conversations going. Luna: Yeah. Next time we'll look at another dividend payer that's navigating this rate environment differently.