After a record December, I was looking to start 2018 off on an aggressive note. I play to push my limits in 2018 and hopefully provide a lot of fuel to my investment portfolio. Despite the fact that the market has also started off on a tear, a few opportunities have presented themselves. After watching the price of REITs such as Realty Income and HCP (Lanny’s latest purchase) continue to fall, I knew that a purchase was inevitable. Let’s see why I added to my position in Realty Income!
Why I added to Realty Income
This isn’t the first time I purchased shares of Realty Income. In fact, I initially purchased 40 shares of the company in November 2016. Once I purchased, I knew that I was going to continue to add to my position one day when the right buying opportunity presented itself. To date, the company is down over 7% since the calendar turned and my position was suddenly in an unrealized loss position! Heck, the company is sliding towards a 5% yield and will get there if the price continues to slide! But I didn’t just recklessly add to my position, here were some of the main reasons why I added to my position..
First, the dividend history. Every dividend growth investor knows this story. Realty Income is the legendary monthly dividend income paying REIT that is on the doorstep of becoming a Dividend Aristocrat. The company has paid a dividend for 569 consecutive months and they have increased their dividend for 81 consecutive quarters. If you visit their website, the company is quick to highlight the pride they take in paying and increasing their dividend to shareholders. If you are a dividend growth investor, of course you are going to love that!
Second, the company released a strong earnings release in the third quarter of 2017. The company highlighted continued investment in new properties (56), 6.9% FFO growth compared to 2016, and management re-iterated their FFO guidance of $3.03 -$3.06 per share. This would place the company’s final Dividend to FFO Payout ratio around 85%, which is reasonable given the fact that REITs payout a large portion of their income. A great, great earnings release that has had me excited since it was released in October.
Third, speaking of acquisition of properties, the company reported in that same earnings release that as of September 30, the company now owns 5,062 properties in 49 states leased to 251 difference tenants. The company’s diversification among tenants and geographic footprint is particularly attractive as it should allow the company to weather economic cycles that may impact a certain region or industry. Some REITs are singularly focused in one industry or one niche pocket of an industry. For example, there are diversified healthcare REITs and there are healthcare REITs that specialize in sectors such as retirement communities, skilled nursing facilities, etc. That’s not the case for Realty Income. While Realty Income does own single tenant properties, the type of companies and industries the company leases to is diverse. Their Top 5 tenants as of September 30th are Walgreens, Fedex, LA Fitness, Dollar General, and Dollar Tree. And on top of it, the largest, Walgreens, only accounts for 6.6% of the company’s revenue. Again, the diversification should allow the company to avoid the economic swings of one specific industry.
Lastly, the final reason has nothing to do with the company. Instead, this relates to the current mood of my investment strategy. Over the years, my wife and I have amassed a portfolio of well over 30 individual stocks. Some positions are large (over $5,000) and some positions are small (less than $2,000). And there are a ton of positions in between. Rather than having a lot of positions that pay small dividends, if the right opportunity presents itself, I would like to continue to build the positions that I currently own. For many of these companies, I have already put in the hard work research the company. I’ve already determined that they fit my investment strategy since I own them! Currently, I received $9ish in dividends per month from Realty Income. I like the amount, but receiving a larger check would be even better.
The Purchase
Enough of the talk, here are the details of the purchase. After some tax planning moves before the end of 2017, my capital position wasn’t as large as it was a month ago, which reduced the size of my purchase. So I added 18 shares of Realty Income at $54.96 per shares, adding $45.90 to my forward dividend income. Now, I own 60.1082 shares that produce $146.40 in annual dividend income. The purchase was made in my Roth IRA due to the fact that dividends from REITs are taxed as ordinary income. So the purchase in my Roth made sense to reduce the taxes paid. The one thing about the purchase that has slightly agitated me was that the company’s price continued to fall after I made my purchase. If I were patient and waited, I could have purchased my shares at a price in the high $52 per share or low $53 per share. Well, the good news is that if the price continues to fall, I will continue to lower my cost basis and add to my position! At the end of the day, I’m just happy I was able to add more shares to a quality dividend stock that has demonstrated an ability to increase their dividend over the long-term.
What do you think about my purchase? Are you also buying shares of Realty Income? Or are you focusing on buying a different REIT or a stock from a different industry all together? I know that utility stocks are also feeling some pricing pressure!
-Bert