“Since going public in 1994, this small company has single-handedly outperformed Exxon, Microsoft, McDonalds, the S&P 500, and the Dow Industrials… COMBINED!
“In that period, it out-gained both gold and silver 8 to 1…
“It crushed General Electric’s return of 462% nearly 10-fold…
“It beat the once-largest company in the world, Cisco Systems, by 220%… and the world’s largest retailer, Wal-Mart, by 493%…
“It paid its shareholders (mostly retired Americans) more income than the combined dividends of Target, Lowe’s, and Coca-Cola…
“And how about the world’s greatest investor? Yes, it even outperformed Warren Buffett’s Berkshire Hathaway by 485%!”
How’s that for an intro, eh? We all know that “past performance does not guarantee future results,” but it’s impressive nonetheless.
So what’s this all about? That intro is from a teaser pitch by Brian Hicks for his The Wealth Advisory newsletter… and it makes a nice counterpoint to the current frantic chatter about IPOs … here’s a bit more:
“On October 18, 1994, one of the greatest investments of the last 20 years went public on the New York Stock Exchange for a mere $8.70 a share.
“Only Apple has had a better return.
“It barely got any attention from big Wall Street firms — after all, it was a microcap stock… the smallest of the small. So it’s no wonder a measly 405,000 shares traded the day it debuted… and its stock never got above $8.77.”
So what was this mostly ignored company that went public 20 years ago and has had such remarkable returns for investors? Hicks calls it the “American Retirement Company” and loves the stock, and thinks it’s “about to get better.” Here’s more from Hicks:
“It’s been one of the best-performing investments of the last twenty years!
- Every $0.25 invested in the “American Retirement Company” at the IPO has turned into $11.26… every dollar has turned into $45.07.
- It has paid more dividends (per 1,000 shares) than pharmaceutical giant Johnson & Johnson and “big blue” IBM.
- It has increased its dividend payout every single year it’s been public.
- And the company has never posted a loss… even during the financial crisis of 2008–2009.
“And guess what? It’s about to get better.
“You see, the company’s business is in such high demand, it’s posting a 44% increase in annual revenue over last year’s. It’s the highest revenue in its history.”
So who’s the company? It’s a landlord. Here are some more clues:
“The ‘American Retirement Company’ is the nation’s largest supplier of space.
“That’s right, commercial real estate.
“It owns and rents out enough office, retail, factory, agricultural, and warehouse space to fill up almost 10 Pentagons. Or to put it another way, it owns so much commercial real estate, it’s equivalent to 1,076 NFL football fields…
“… the company has paid 241 consecutive monthly dividends since going public in October 1994. It has never missed a dividend payment. Ever!
“The “American Retirement Company” is so reliable and trustworthy, my parents purchased it based on what I told them.
“And I want you to own it too… and start collecting monthly dividends just like my parents.”
So who is it? Well, there is a whole passel of other clues in the spiel from Hicks, which you can see here if you’re curious, but he’s teasing a longtime income investor favorite that many of you have probably heard of: Realty Income (O)
Realty Income is an extremely shareholder-focused REIT that owns primarily small shopping centers and pads that are occupied by fast food restaurants, pharmacies and similar kinds of tenants, primarily national and regional chain stores. Over the years they’ve also expanded and acquired other kinds of properties, including auto dealerships and wineries, but the core of the company is still the “boring” stuff that got them started — the company came to life about 50 years ago by buying up the land underneath fast food restaurants, and has had a focus on consistency, gradual rent increases, and monthly dividend payments ever since.
We’ve covered the company in the past — the stock was teased pretty heavily by Tom Dyson back when he was running the 12% Letter for Stansberry in 2007 and 2008, and it has been mentioned by several other pundits over the years. They went so far as to trademark the “Monthly Dividend Company” line and continue to be very focused on delivering a growing monthly payout to shareholders, which is why so many retirees like the stock and why, I assume, Hicks has given them the “American Retirement Company” moniker.
The stock is down a bit these days, and in fact fell again just this week as they announced a secondary offering to raise capital for more acquisitions — that’s not necessarily a red flag, REITs always have to raise money for acquisitions (that is both the blessing and the curse of being a Real Estate Investment Trust … you can’t retain earnings to reinvest in new business or acquire new buildings, because the pass-through status of a REIT means you have to pay out your earnings as dividends and, in practice, the lust of investors for dividends means that REITs typically pay out more than their earnings as dividends). So if you want your REIT to grow faster than the rate of inflation, you have to accept that they’re going to make acquisitions … and to make acquisitions they have to sell new shares.
That doesn’t mean the dip makes it a “no brainer” buy, of course — this is a big REIT, and they have grown their payouts much more slowly over the last year or so than they had before, it is harder and harder to move the needle appreciably upward when you’re a $8 billion company, picking up a few new strip malls every quarter doesn’t necessarily move the needle enough.
And the fact that O is overwhelmingly focused on and owned by individual investors means that they are judged almost entirely by their dividend. If they keep up the monthly dividend and keep raising it bit by bit to keep up with inflation, people keep holding their shares … but when everyone panicked last Spring about the Federal Reserve raising interest rates (which is widely perceived as hurting REITs, though over the long term that’s not necessarily the case), the stock quickly gave up the spike in gains it had enjoyed after acquiring American Realty Capital Trust and raising the dividend. That acquisition was a big one, by far the largest by O at almost $3 billion, so it took a bit of time to digest and the shares have probably been somewhat depressed by the small dividend increases combined with the general fears about REITs.
I think I’m probably more optimistic about good REITs than most people are. I don’t have any interest in the mortgage REITS, which are far too levered and interest-rate-sensitive for my tastes, but I own several REITs that own valuable properties and have the ability to consistently increase their dividend, and I think real estate is likely to remain a relatively stable long-term holding thanks to the ability of well-managed REITs to raise their rents as inflation hits or as interest rates rise… but that doesn’t mean they’ll happily sing their way through a spike in interest rates, REITs are almost all levered and it takes time for their rents to bump up in response to inflation so if we see hyperinflation or rapidly rising rates it will absolutely mean a clobbering for these stocks. I just think a more moderate future is more likely, and that well-managed REITs (and O is certainly in that category) will probably do fine over the long run.
Realty Income had a yield of about 6.5% back in 2008, and it has a yield of about 5.25% now, (it was well above the average for REIT yields back then, as it is now, but for most of the intervening years it had a yield of closer to 4% as people arguably overpaid for the perceived stability) — and the stock has risen by about 50% during that period. So that’s nothing to complain about … but during short periods it can certainly go down sharply, and when interest rates rise or REITs fall out of favor it can certainly do quite poorly. The stock is owned largely by individual investors who value it for the monthly dividend, for the gradual dividend growth, and for the shareholder-friendly management that hasn’t made big mistakes… so the competition for these shares is other “perceived as safe” investments.
The big picture, then, is that if we saw savings account or CD rates or 10-year treasury notes come back to 5% (they range from 0.5-2.75% at the moment), you can bet that people would demand substantially more for a REIT dividend than 5%, particularly if the dividend is not growing rapidly, and the borrowing costs for REITs would rise commensurately (almost all REITs have either corporate debt or mortgages as part of their financial structure to lever up their cash flow, they wouldn’t be able to pay decent dividends otherwise). So if you think we’ll see rates spike higher this year, wait to buy REITs until they do … but I personally have been buying REITs pretty consistently over the last year or so (not specifically Realty Income, which I don’t own, but others that aren’t terribly dissimilar), and I expect them to continue to be relatively solid long-term investments that help to diversify my portfolio.
If you’re looking for a solid monthly dividend and a well-run REIT, you could certainly do far worse than O — it’s not going to grow sharply, in all likelihood (optimistic anticipation of that growth, and expectation of low interest rates forever, caused the big jump to $55 last year before it fell back to $40), but you can probably count on them continuing to pay that dividend every month and giving you that 5% dividend that will likely grow by a few percent a year … and unless something really drastic happens, it’s hard to see them cutting the dividend — they’ve never cut it in their history, and the fact that they didn’t cut it in 2008 or 2009 gives an extra vote of confidence in the stability of their cash flows. It would probably take more big acquisitions to see a sharp dividend increase, too, so you’d probably be wise not to expect big capital gains from the shares.
That’s what I know about Realty Income — I don’t own it, but at the currently somewhat-depressed price after their secondary offering now might be a decent time to get in if you’ve been looking for a large and stable monthly dividend company. It won’t make you rich, but it will probably not disappoint as long as a 5% cash return looks good to you and you can ignore the fluctuating share price. Sound like the kind of thing you’re interested in? Too worried about rising rates to invest in REITs? Let us know what you’re thinking, just use the friendly little comment box below.
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