I have a little capital to invest over the next few weeks and I am looking to make a splash with my next purchase. It has been a few weeks since I purchased my last stock and I am starting to get the itch to invest again. I still have just under $200 to go to achieve my goal of reaching $2,750 in projected dividend income by the end of the year, so I want my next purchase to count. Don’t worry everyone, I’m not chasing yield, I’ve learned that lesson the hard way. My focus is shifting to a company that I am shocked is not in my portfolio by now and I may be the only investor in the dividend growth investing community to not own this stock. It is time to run Realty Income through the Dividend Diplomats’ Stock Screener.
About Realty Income
Before diving into the numbers, let’s take a quick tour of Realty Income’s Investor Relations Page to learn about the company. Realty Income owns over 4,400 properties spread across the United States. Not only does the company enjoy demographic diversification, but the company’s properties lease to companies that operate in 20+ different industries. If you spend two minutes on the website you would understand very quickly that management embraces and promotes their diversification among location, property types, and industries (as evidenced by the preceding two sentences). That’s one of the major advantages Realty Income has over many other competitors that operate in only one sector of the real estate market.
Realty Income is also one of the few companies that pays a monthly dividend. Man would it be fun to receive a dividend from a company on a monthly basis and regularly get to see the power of dividend re-investing take place. The one fear of paying a high, regular dividend is the reliability of the dividend income stream. Realty Income a 98% occupancy rate for their properties and prioritizes maintaining their current tenants to avoid turnover and extended periods of vacancy. To management, having a stable revenue stream is the key to maintaining their growing, monthly dividend. Now that you know a little about company, let’s take a look at the numbers.
Stock Analysis & Other Metrics
There are many other REITs that operate in the same industry as Realty Income. However, few possess the same level of diversification and therefore, finding a comparable company for the purposes of a stock analysis is difficult. Therefore, I am going to throw a little curveball at all of you as review the metrics. Realty Income is not the only REIT on my radar….I am also watching HCP closely as the price continues to fall. Lanny jumped on the HCP wagon again last week and added to his impressive stake in the company. Similar to Realty Income, HCP is a diversified REIT that possesses an impressive dividend and holds the title of Dividend Aristocrat. So let’s see which company is a better fit NOW as we run both Realty Income and HCP through our stock screener.
- Price to
EarningsFFO below S&P 500 – While EPS is the standard metric for corporations, REITs use a non-GAAP metric called FFO (Funds From Operations) as the primary earnings metric. The first item on the stock screener calls for measuring the pricing multiple against the S&P 500 to ensure the stock is trading at a discount compared to the broader market. However, this aspect of the metric is not applicable due to the differences between Price to FFO and Price to Earnings. Therefore, I will just compare the Price to FFO for the two companies in questions. Realty Incomes’s P/FFO ratio is 17.18X using the annualized Q3 2015 FFO/share figures while HCP’s P/FFO ratio using the same metric is 14.36X. Based on HCP’s recent performance, it is not surprising that HCP is trading at such a steep discount compared to Realty Income.
- Payout Ratio Less than 60%– Again, this is a metric better built for corporations and not REITs because REITs are required to pay shareholders a significant portion of their earnings. So again, I will compare the payout ratios of the two companies using the annualized dividend dividend by the Q3 annualized FFO figures. Using these figures, Realty Income has a payout ratio of 83% and HCP has a payout ratio of 82%. So no difference between the two companies here.
- History of Increasing Dividends – Both REITs have a great track record of increasing their dividend. Realty Income pays a monthly dividend and is known for increasing their dividend multiple times in a fiscal year. In 2015, O has increased their dividend four times! I wouldn’t be shocked if there is one more increase during the year at this rate. Plus, O has increased their dividend for 72 consecutive quarters and has paid a dividend since the company was founded in 1969. HCP has also paid an increasing dividend for an extended period of time. After all, HCP is the only REIT that has earned the prestigious title of Dividend Aristocrat. Unlike Realty Income, HCP pays a quarterly dividend and only increases their dividend once per year. One thing is obvious. Both companies have a management team that is committed to paying a growing dividend income stream and the companies have backed up this assertion over the years. **Image courtesy of Realty Income’s Investor Relations Page
- Dividend Growth Rate– We wrote last year about how powerful the dividend growth rate is and why it is such an important metric. So let’s take a lok at the 3 and 5 year average dividend growth rate for each company. Realty Income’s 3 and 5 year growth rate is 9% and 6%, respectively, while HCP sports a 3 and 5 year growth rate of 4% and 4%, respectively.
- Dividend Yield – Typically I avoid reviewing the dividend yields of the companies I am analyzing because I don’t want the yield to impact my final decision. If I avoid this number I can focus on the other metrics that are centered on identifying undervalued dividend stocks with a history of paying a growing dividend. However, I believe that steps 1 through 4 have validated that both companies are great companies and I should look at all differences between the two in my due diligence. And right now, their is a large disparity in dividend yield worth pointing out. At the moment, Realty Income’s dividend yield is 4.82% and HCP’s dividend yield is 6.9%! Wow, a 2.1!% difference. As I said, yield won’t be the final factor but that is too large of a difference to ignore.
- Next Dividend Payment – I am writing this analysis as of 11/15/15. So I wanted to see when I would receive my first dividend check from each respective company. That’s the beauty of Realty Income and their monthly dividend. The company declared their next dividend with an ex-dividend date of November 27th and a payment date of December 15th. So I won’t have to wait too long to receive my first dividend payment from O and the power of dividend reinvestment can begin immediately! Conversely, I missed the last dividend and wouldn’t receive my first check from the massive healthcare REIT until February 2016! Sure the yield is juicy now, but will it still be then. That’s a lot of time when considering I can receive my first dividend from O just 30 days from now.
This may seem like a cop out answer, but I don’t think I could go wrong investing in either company. I’ll be in great shape whether I decided to initiate a position in Realty Income or add to my current stake in HCP. Both companies are great companies and would serve any dividend growth investors portfolio well. So for now, I am going to wait and see what the market gives me over the next few weeks and hope for Mr. Market to take another turn for the worse. I would like to make a move, but I don’t have to. So barring anything drastic or a sudden drop in one of the companies on my “Always Buy” list, I will most likely invest in one of these two companies soon. Who knows, if the Fed decides to increase interest rates and REITs suddenly tank I may scrape together the funds to invest in both companies. Hopefully I can cut the cord on my cable bill soon and I can continue to fund more purchases like these! The name of the game is adding strong companies to your portfolio that will produce a growing dividend income stream for years to come. That is the foundation that financial freedom is built on.
Do you own O or HCP? Are either of the companies on your watch list? If one is over the other, why? If you were me, which company would you investing at the moment? Or should I be focused on other companies? Thanks everyone I am looking forward to your feedback!