Determining the Amount of Realty Income Stock Needed to Generate $100 in Monthly Passive Income

Determining the Amount of Realty Income Stock Needed to Generate 0 in Monthly Passive Income

The benefit of owning dividend stocks is that you can consider your spending based on how many shares you need to cover a certain expense. For example, let’s say you pay $100 per month for car insurance. You might ask: how many shares of a monthly dividend stock like Real estate income (NYSE:O) should I pay this bill using passive income?

It’s 390 shares in this case.

If you do it right, you can build your portfolio to generate the funds needed to pay your bills. Eventually, you might reach a point where you spend less time working and more time doing the things you love or maybe just relaxing on a beach somewhere.

Whatever your goal, consider buying Realty Income stock to help you get there. Here’s how it can work.

Realty Income helps fund reliable sources of income

Real estate income is a real estate investment trust (REIT). It specializes in real estate and allows investors to benefit from the advantages of owning real estate without actually possess he. It combines aspects of being a landlord and owning shares. REITs must pay out at least 90% of their taxable profits to shareholders, which is why REITs like Realty Income make great dividend stocks.

As a real estate company, Realty Income depends on quality tenants who will pay their rent. Otherwise, investors don’t get paid. This is where Realty Income shines. It focuses on commercial tenants who operate recession-proof businesses. Think grocery stores, convenience stores, and dollar stores: places where people shop during good deals. And bad times.

Determining the Amount of Realty Income Stock Needed to Generate 0 in Monthly Passive Income

Image source: Real Estate Income.

This is a winning formula for Realty Income, whose profits have held up regardless of economic conditions. The pandemic was a real estate bust, but Realty Income’s cash flow from operations never fell more than 7%. In other words, the money is systematically there to pay its dividends.

O Funds from operations (TTM) graphO Funds from operations (TTM) graph

O Funds from operations (TTM) graph

Realty Income has a rock-solid dividend

This reliable cash flow has made Realty Income a reliable dividend stock. The company has paid and increased its dividend for 31 consecutive years. It is also a high yield product; investors get 5.7% at the current stock price.

THE dividend distribution rate is also only 71%. Remember how I said cash flow never fell more than 7% during the pandemic? Yes, this represents a margin of safety of 22 points in the dividend payment.

O Cash Dividend Payout Ratio TableO Cash Dividend Payout Ratio Table

O Cash Dividend Payout Ratio Table

The company’s dividend hasn’t grown very quickly, just 3.6% per year over the past five years. However, add in its high starting yield of 6.1%, and Realty Income can be a great stock to hold and let the dividends accumulate over time. Reinvesting dividends can also increase your portfolio returns.

Are stocks worth buying today?

The price you pay becomes especially important for Realty Income since the company is not growing quickly. Overpaying can lead to underperformance if the company needs to make up for a high valuation. So, is Realty Income attractive today?

The stock trades at 13 times funds from operations (FFO), the equivalent of a REIT’s earnings. At the same time, analysts expect the company to grow its FFO by 3% to 4% annually over the next few years.

This isn’t a great valuation for such low growth, but Realty Income’s strong fundamentals also give it some premium. Overall, I would say that the shares are fairly valued today. Investors can look for high single-digit annual total returns and a dividend that will continue to grow.

Keep in mind that Realty Income may be sensitive to U.S. Treasury yields. Higher Treasury yields make borrowing, a key part of a REIT’s business model, more expensive, creating headwinds for real estate income. Investors can also turn to Treasuries instead of stocks if the yield is attractive enough. You can see the inverse relationships below:

Chart O Price/CFO per share (TTM)Chart O Price/CFO per share (TTM)

Chart O Price/CFO per share (TTM)

To summarize, Realty Income remains a conservative but high-quality dividend stock that can provide investors with monthly cash flow. Those looking to passively pay their bills shouldn’t hesitate to consider the stock.

Should you invest $1,000 in real estate income right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool posts and recommends Realty Income. The Motley Fool has a disclosure policy.

Here’s How Many Real Estate Income Stocks You’d Need to Buy to Make $100 in Passive Income Every Month was originally published by The Motley Fool

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