Key Points
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Very few dividend stocks can now compete with bonds’ income potential, even including super-safe government bonds.
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One stock in particular, however, can top higher Treasury yields without posing significantly more risk.
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While this ticker boasts a better income profile, unlike most other stocks, there’s no guarantee of major capital appreciation. Given its yield though, you may not care.
- 10 stocks we like better than Realty Income ›
For the first time in a long time, Treasury bonds are a compelling alternative to dividend stocks.
The yield on 10-year Treasuries now stands at a 19-year high of right around 5%, in fact, versus the S&P 500‘s (SNPINDEX: ^GSPC) average dividend yield of just over 1%. Indeed, only about 25 of the index’s stocks offer better yields than 10-year Treasuries do at this time, and some of those names aren’t exactly on a firm footing.
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There’s one of these higher-yielding S&P 500 names, however, that I’d recommend more than any other dividend stock right now. That stock is Realty Income (NYSE: O), which currently boasts a forward-looking yield of 5.8%.
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What’s Realty Income?
You may be more familiar with this unfamiliar name than you realize. It doesn’t do any consumer-facing business. Rather, it supports a bunch of consumer-facing companies you’re sure to know.
Specifically, Realty Income is a landlord to a bunch of brick-and-mortar retailers including Walmart, CVS, Family Dollar, and Dollar General just to name few. Although the retailing industry may be struggling to compete with online-shopping alternatives, Realty Income’s consistent occupancy rate of nearly 99% (of its 15,500 individual properties) indicates its tenants are the business’s most resilient names.
It’s ideally built to serve as a dividend-paying stock too.
See, Realty Income is structured as a real estate investment trust, or REIT. That just means as long as the majority of its rent-driven profits are passed along to shareholders in the form of dividend payments, they’re not first taxed at the corporate level only to have it taxed again when investors receive that income.
And this REIT’s dividend pedigree proves the company’s resilience. Not only has Realty Income paid a dividend like clockwork since being founded in 1969, but has raised its annualized per-share dividend payment every year for the past 31 years.
The kicker: Unlike most dividend stocks, rather than a quarterly dividend, Realty Income’s dividends are paid on a monthly basis, more closely aligning with how consumers incur their bills (if you’re looking for income stocks to help cover your recurring costs of living).
More pro than con
That’s the bull case anyway, although there is one arguable downside to consider before diving in. That is, although Realty Income shares trade just like any other stock and are therefore capable of producing capital appreciation, they don’t always do so. Being dependent on borrowing to fund the purchase of properties that facilitate expansion, this ticker is highly sensitive to high and/or rising interest rates. That’s a big part of the reason this stock’s made little net progress since early 2020, when the COVID-19 pandemic was in full swing.
Nevertheless, with such a strong starting yield and reliable dividend growth that isn’t apt to stop anytime soon, Realty Income is still one of the only longer-term income holdings I’d be interested in buying at this time even though I could lock in a respectable interest rate of 5% for a 10-year stretch with bonds backed by the U.S. government itself.
Should you buy stock in Realty Income right now?
Before you buy stock in Realty Income, consider this:
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dollar General, Realty Income, and Walmart. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
