Realty Income (O): A look at the past five years

Realty Income (O) stock reached an all-time-high of $82.29/share in February 2020, or about five years ago.

Today, the stock is selling at $56.50/share.

This is a stock price decline of 31.30% over the past five years.

Yet, this Real Estate Investment Trust (REIT) grew FFO/share from $3.29 in 2019 to $4.02/share in 2024.

This is an increase in FFO/share of 22.20%.

Note that the last three years have had FFO/share basically stay around $4/share, which possibly also makes some investors "nervous". Though prospects for FFO/share growth may appear promising too.

So why did this happen?

Long-time readers know that future returns are a function of:

1. Dividends

2. Cashflows per share (I also use EPS interchangeably or FFO/share here)

3. Change in valuations

The first two items are the fundamental sources of returns. Those are the sources of return that matter the most in the long run. I define the long run as a period that is at least 10 years.

The last item is the speculative source of return. It matters the least in the long run. It does matter a lot in the short run - that is over a period that is 5 - 10 years or so.

It looks like in the case of Realty Income the business actually increased cashflows over the past five years.

Monthly dividends per share also increased from $0.2325 in January 2020 to $0.2640 in January 2025. Subsequently the REIT hiked monthly dividends to $0.2680/share in February.

The reason is that the valuation multiple decreased over the past five years, acting as a headwind to share price appreciation.

Basically the stock sold at a Price to FFO of 25 in 2019 to a Price to FFO of 13.60 in 2025.

The multiple shrank by almost half in the past 5 years, when the business actually improved and generated more in cashflows per share.

This is a huge headwind in the short-run, entirely driven by the changes in investor appetite and how much they are willing to pay for a dollar in FFO/share

Some of it was driven by change in interest rates, as the 10 year Treasury Yield went from 2% in late 2019 to 4.40% today. But also the changes in investor appetite for REITs.

The reason for the poor performance in the stock was because investors were over excited about the stock five years ago, and were willing to bid it up. Perhaps that was also because interest rates were low.  Investors were willing to pay a premium valuation for this REIT five years ago.

Today however, investors are not willing to pay premium valuation for this REIT.  Interest rates are also higher as well. 

Predicting investor moods is very hard. Some times they are overly exuberant about a company (like they were about Realty Income in 2019). Other times, they are not excited at all about it (like today).

I believe that the mutliple today appears fine. I have no idea if the FFO multiple would shrink or grow in the future.

I do believe Realty Income will continue to grow FFO/share over time, and its investors would continue to receive their monthly and growing dividends over time. The company has been successful in doing just that for about 30 years as a publicly traded company, through various boom/bust cycles.

Sean William Scott - Dividend Investor

I came upon an interesting story about another dividend investor, this time a famous actor. This is Sean William Scott, who starred in such movies as American Pie. The Yahoo Finance article is an interesting read.

Seann William Scott, best known for his role as Stiffler in the Movie American Pie, has built a strong financial foundation beyond Hollywood. 

He has a dividend portfolio worth $12 Million, which generates $31,000 in monthly dividend income.

He has been able to smartly save and invest his income from acting, which is why he also has $18 Million in paid off real estate.

All of this passive income can provide for his needs, even if he is unable to secure new acting gigs.

This is great to hear, because acting is a notoriously volatile profession. It takes a long time to get established, and to get acting gigs. You may make a lot of money on a few projects, but that money does not always last. You may not be able to secure another role that ends up being highly paid. 

Hence, it is important to avoid inflating your lifestyle, and it is very important to save quite a bit from any windfall, and invest it wisely. There are lots of things that could go wrong, from spending, to investments to dealing with sudden influx of wealth when you are not ready and do not have the ability to manage those finances.

It looks like the royalties and dividends exceed his spending. He said he received another $47,400 in royalty payments and $31,685 in interest and dividends. He also earned $140 in residuals last month. Though that spending does seem high. He said his monthly expenses total $49,739, including $15,333 in property taxes, $8,000 in homeowner’s insurance, $7,554 in child care, $1,500 on eating out, $2,000 on utilities, $1,000 on health care, $1,500 on clothes, $1,800 on education, $1,500 on entertainment and gifts, $1,000 on auto expenses and various other bills.

It's unfortunate that his dividend portfolio holdings are not listed. But based on the monthly dividend amounts, it looks as if he generates a dividend yield of about 3%. Assuming this income is invested in a diversified portfolio of companies, it would likely grow at or above the rate of inflation over time. Qualified dividends are also tax-advantaged, meaning that they have lower tax rates than ordinary income too.

It's great to see the example of someone who made large incomes, and also managed to save and invest a large portion of it. It is unfortunate that we get to see these figures publicly, due to a divorce. Divorces can definitely put a serious dent on any otherwise well-crafted financial plan.

To paraphrase the late Charlie Munger, there are three ways that a smart man could go broke:

"ladies, liquor and leverage"

As we know, higher income won't fix bad spending habits. For example, a lot of athletes tend to make millions of dollars over short periods of time, only to have nothing to show for it later. That's because humans are programmed to base their spending on their incomes. If you suddenly get a large income, you start spending as if this income would last forever. Sadly, it doesn't, which leads to all sorts of potential problems. If you haven't this documentary can be quite interesting. 30 for 30 Broke

Did you find this story inspiring or motivational? You may like these stories listed below as well. Or if you are interested in sharing yours or another story, reach out at dividendgrowthinvestor@gmail.com

Relevant Articles:

- How Ronald Read managed to accumulate a dividend portfolio worth $8 million

- How Anne Scheiber Made $22 Million Investing in Dividend Growth Stocks

- How Grace Groner Turned $180 in $7 Million by Investing in Dividend Growth Stocks

- This Is How This Successful Dividend Investor Turned $1,000 Into $2 Million

- The Oracle of Buffalo

- How Earl Crawley Built a $500,000 Dividend Portfolio on Minimum Wage

19 Dividend Growth Stocks Raising Dividends for Shareholders

As a shareholder, there are two ways to make profits from a stock. 

The first way is when you sell your stock for a gain, after it has increased above your purchase price. The downside is that once you sell your stock, you will not be able to participate in any further upside. If you hold patiently however, you will experience a surge in net worth if the business succeeds. 

The second way is when a stock you own distributes a dividend. A company typically distributes a dividend after carefully evaluating its business needs. If a business does not find enough good opportunities to deploy profits at high rates of return, then the rational thing to do is to distribute it to shareholders. Some businesses are able to both grow earnings and dividends. 

There are over 520 businesses in the US, which have managed to increase dividends to shareholders for at least a decade. I try to monitor most of them, in an effort to review existing holdings, and uncover companies for further research. 

My monitoring process involves different steps. I regularly screen the investable universe, using my criteria, before reviewing promising candidates. I also review some major news like filings and dividend increases as well for a narrower view of the universe.

For example, last week, there were 63 US companies that raised dividends. Of those companies, only 19 had managed to grow dividends for at least 10 years in a row. You can view this list below:

As part of my review, I look at the size of the increase and compare it to the five and ten year average. I also review the trends in earnings per share, in order to determine if the track record of dividend growth was from a solid base.

I like reviewing trends in payout ratios, in order to determine dividend safety. This of course is best done in conjunction with reviewing of earnings per share.

Last but not least, I also review valuation, in order to determine if a company is worth reviewing today for a potential acquisition.

When I review companies, I look at ten year trends in:

1) Earnings per share

2) Dividend payout ratio

3) Dividends per share

4) Valuation

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

How to think about the sources of investment returns

In terms of a somewhat succint summary, it is good to think in terms of trade-offs in the full picture. The expected returns formula I use really summarizes things neatly, and makes you think about how changes in the different variables impact overall results over a given time period.

The expected returns formula is a function of:

1. Dividends

2. Earnings Per Share Growth

3. Changes in valuation

I am using this additional step in the exercise, because quite often I see folks whose whole analysis stems from looking at a price chart and making up their mind from it. This is dangerous in my opinion, because you need to understand the context and reasons of why what happened happened. And from them to determine if it can happen further in the future, or not. All probabilistically speaking of course.

One needs to look at these three items together, rather than in isolation, when it comes to understanding where returns come from.

But in general, the first two items, dividends and earnings per share growth are the fundamental sources of returns. Over long periods of time, of at least 10 - 20 years, these items generate the lions portion of returns. The percentage increases the further out in time you go.

The last time, change in valuation, is part of the speculative returns. This can ebb and flow wildly in the short run, from month to month, year to year and even 5 - 10 years. Changes in valuation can push down returns or really accelerate returns in the short-run, but those are very hard to predict. The longer your timeframe however, the lower the importance of the changes in valuation on returns. Unless of course you really really overpaid at the start - think investing at 100 times earnings in Nikkei in 1989 or buying tech stocks at 100 times earnings in 1999. 

As a long-term investor, I focus on fundamental returns (dividends and earnings). I do try to ensure I am not overpaying for a security. Other than that, valuation is a range that is accepted or not. My goal is to find a good company I can hold for decades first. Valuation is important, but in reality it only affects a portion of my returns.

For example, if I invest in a stock it does matter if I pay 15 or 25 times earnings for it in the first decade of ownership. After all, if growth in earnings per share is the same under each scenario, you are better off buying at 15 times earnings. Buying low also means obtaining a higher starting yield today. In an ideal world, you would buy low, then be able to reinvest dividends at a higher yield, and then ultimately the stock price would be revalued higher. This is how many of the greatest investors have done it.

However, you do not always have the option of either buying low or buying high. In many cases, you may have to "buy high" because you may also miss out on buying at all. There is an opportunity cost associated with waiting for too long for the perfect set-up that never comes.

After all, the real wealth for a long-term investor is not if you bought at 15 or 25 times earnings, but identifying a company that can grow those earnings at a steady clip over time, and pay a growing dividends along the way. It took me a long while to realize this lesson.

I really love this chart from the late Jack Bogle, which illustrated the interplay between the sources of return on S&P 500 between 1946 and 2015. It really puts things in perspective. 

This type of thought process works on individual companies, indices and other assets such as bonds for example.

I have posted several articles in the past, discussing the sources of investment returns, and applying the concepts to real-world situations. You can read and enjoy below:

Altria, Dividends and Total Returns

Sources of Investor Returns: Visa Edition

A Simple Model For Estimating Future Returns

Price, Value and Sources of Returns

Realty Income Over The Past Five Years

Microsoft During the lost decade

The one lesson from the first "Lost Decade" of the 21st Century..

Value in Growth Clothes: Growth in Value Clothes

The Best Performing Dividend Aristocrat Over The Past Decade

Microsoft and Altria: A Look at the past decade

Altria and Microsoft - returns over the past decade

Twenty Dividend Growth Stocks Raising Dividends Last Week

 I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings, but also potentially identify companies for further research. Plus, it helps me get the pulse of corporate boards. One of my favorite exercises in compiling this report is to look at the press releases, and noting down management verbiage related to the dividend increases. That pulse check is a good sentiment check. After all, dividends have a great deal of signaling power, which neatly summarizes corporate board expectations about near term business conditions. The output of that being the dividend increase amounts. 

TL;DR - dividend increase announcements include a lot of information that could be helpful to me as an investor.

Over the past week, there were 60 dividend increases in the US. I went ahead and isolated the 20 companies that increased dividends last week AND have a ten year track record of annual dividend increases. The list can be observed below:

Reviewing the dividend growth universe for dividend increases is part of my monitoring process. For my review, I narrow my focus to the companies with a ten year streak of annual dividend increases. I do this in order to look at companies with a sufficiently long streak of dividend growth.

The next step involves reviewing trends in earnings and dividends. I want to see earnings per share which are growing. Rising EPS can fuel future dividend growth. I also want to see dividend increases which are of decent size, and not done merely to maintain the streak of annual dividend increases.

A steep deceleration in the dividend growth rate relative to the ten year average tells me that management is not very optimistic on their business. If this is coupled with a high payout ratio and stagnant earnings per share, I can tell that the dividend streak is nearing its end.

Last but not least, I also want a decent valuation behind an investment. If I overpay dearly for an investment today, this means that the expectations for the first few years after I make the investment are already baked in the price. As a result, I want to void overpaying for an investment. Unfortunately, this is easier said than done.