Realty Income (O) – The Monthly Dividend Stock

Realty Income (O) – The Monthly Dividend Stock

best monthly paying dividend stocksYes I may have mentioned this before. And if you talk to me in real life, chances are I’ve probably mentioned this in conversation too (maybe too much). I think Realty Income is the best monthly paying dividend stock. This is a Real Estate/Financial stock that pays out dividends MONTHLY. This company is listed on both the S&P 500 and the S&P Dividends Aristocrat. They’ve been dividends consecutively for nearly 50 years. If you’ve ever wanted consistent monthly cashflow, this is the stock to do it. And here I will be doing a full financial valuation on the company.

Best Monthly Paying Dividend Stock: Realty Income O

Realty Income is a real estate company that leases properties to the commercial industries. Their tenants include Taco Bell, Wal-mart, Walgreens, CVS, FedEx, etc. Well-known large corporations.

You get the picture.

The tenants sign into a contract to lease these location for a certain number of years which then provides consistent rental cash flow. Many of these tenants renew their leases when the time comes unless they decide to shut-down or move the business.

So Monthly Dividends You Say?

As of today, shares are trading a little bit over $60 per share and pay out dividends in the amount of $0.20 per share, per month.

This means for $6000, or 100 shares, you’re getting a check for $20 a month.

 

realty income monthly dividends 1

We can scale this out such that if we increase our investment, then our monthly dividend paycheck increases.

realty income monthly dividends 2

 

Investing $600,000 will generate $2,000 in dividends per month. This is enough for many people to live on, especially in lower cost of living areas and lower cost of living countries. For those on the quick path to Financial Independent/Retired Early (FIRE), saving up $600,000 may not take very long at least compared to those who work from 22 to 66 and then retire. It’s very possible $600,000 can be accumulated within a decade.

Is this worth the monthly dividend payments?

Let’s look at the 1-year plan. Investing $6000 to earn $20 per month for 1 year.

The Opportunity Cost

Before I dive into the mathematics, I’d like to elaborate on what the “Opportunity Cost” is.

Basically it’s the next best investment alternative. The next best place to put your money.

Of course everyone has different circumstances, so we need to standardize the opportunity cost for this example.

First, let’s assume the next best place to put your money would be to stick it into a 1% yield savings account. Then, we need to determine if it’s better to keep our money in a savings account or to put it in the best monthly paying dividend stock.

The Long Method

The way to determine whether or not our investment is better or worse than the savings account, is to do the following:

  1. Calculate how much money we have after 1 year of dividends from the Realty Income investment.
  2. Calculate how much money we would have if we stuck it into a 1% savings account and compounded it for a year.
  3. Take the difference between the two numbers to see which one is greater.

The Net Present Value Analysis

Fortunately in finance, we can do this quickly by taking the cash flows of our investments and discounting it by the rate % of the opportunity cost (the discount rate). We call this finding the “Present Value” of our investment. If the present value is positive, it means this investment will add value to our lives. If it’s negative, it generally means that it’s a bad investment, and that it will add negative value to our lives.

Our opportunity cost (the next best alternative) would be sticking $6000 into a savings account at the current rate of 1% per year.

If we stuck $6,000 into a savings account for one year, then at the end of the year we would have $6,060.30. This is verified using the compound interest calculator on Investor.gov.

compound interest calculator

For the NPV analysis, we’ll assume that banks do daily compounding so our rate in our formula would be (1% / 252). We’ll also assume at the end of 12 months, you get your initial $6000 back.

Based on these calculations, the value of investing $6000 into Realty Income presents us with a positive Net Present Value, which means it adds value to us.

NPV Analysis Realty Income

Note: NPV Formula =NPV(1%/12, Cashflows from months 1 thru 12) – initial investment of $6000. There’s a small discrepancy between the $179.03 calculated this way and the $179.70 calculated earlier. This can be attributed to a compounding rounding error. 

What About a Longer Time Frame?

Putting money into Realty Income for longer time periods will provide us with a more meaningful investment. Let’s pretend we’re buying this stock for our retirement account and holding it for 20 years. We continue to assume that we liquidate our position in the last year and get our $6000 investment back. Our present value would be even greater due to compounding! What a great deal for retirement and evidence as to why this is the best monthly paying dividend stock.

 

Risks

If this is one of the best monthly paying dividend stocks, there has to be a catch right? There are a few underlying assumptions with this model that need to be considered:

  • Assume dividend payments are consistent and the company doesn’t decide to cut it for some reason. However, being an REIT company, they’re allowed to forego taxes if their payout ratio is above 90%.
  • Realty Income is highly sensitive to factors affecting the real estate market. This includes costs of financing and interest rates.
  • At the end of the investment period, we’re assuming we’ll be able to liquidate our position and recover the amount we put into it. This is analogous of working capital. The actually price at liquidation will mostly like different. If it’s higher, we take a capital gain. If it’s lower, we take a capital loss. This will ultimately affect the value of our investment.
  • We’re assuming that the “discount rate” in this scenario is the next best alternative to our investment project. In corporate finance, the real discount rate used in capital projects will account for investors required return on the company’s equity and will factor in any costs of debt, as well as government default-free bonds.

Conclusion: Realty Income!

In conclusion, even under the 1-year time frame, as a retail investor and consumer, the model shows that it’s more beneficial to invest in this stock for monthly dividends instead of sticking it into a high-yield savings account. This is after all, one of the best monthly paying dividend stocks on the market. Additionally, it is a REIT which is comprised of many different residencies and fully diversified. That is to say, this assumes everything holds constant for the duration of 1-year. Given Realty Income’s track record, it’s likely they may even increase dividend yields year-over-year, as they move on to their 48th year of monthly dividend payments.

Disclaimer: I am currently Long Realty Income (Ticker Symbol: O)

 

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