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Old 07-22-2012, 11:40 AM   #1
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Just wondering if anybody has done any business with this reit company, how safe is it? The dividend yield looks relatively nice, and it seems to be a diversified reit (ticker simple O). Looking for bond fund alternatives/income alternatives. I am not retired buy ultimately would need yields preferably north of 5% if possible.

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Old 07-22-2012, 12:06 PM   #2
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I have a position in O - approximately same size as my other positions ($3k or so), so not a huge amount where if disaster strikes or the divvy gets slashed I don't have to sweat it too much.

My big criteria for REITs is to check to see what % of their distributions are income from operations, short term/long term cap gains, and return of principal.

The 'best' ones will be basing their distributions on 100% of income from operations (or as close to 100% as possible) - these are the 'most sound' choices, since a REIT that has distributions where 50% or even 70% of the distribution is return of capital will eventually have to cut the div, since they can't keep returning your money to you for an extended period of time without issuing huge amounts of debt and/or stock - and this is unsustainable for extended periods of times (just like a ponzi scheme). Same thing with Capital Gains - while a REIT could occasionally liquidate some properties with a big net gain, they can't be anticipating a recurring high cash flow from selling properties, so it should be a one-time deal and not be a significant source of their dividend strategy.

Most REITs should indicate this % of payout on their Investor Relations section of their website. They are required to determine this at the end of the year for tax purposes, so a news release between November and March of each year should indicate this.

I also like to buy preferreds of REITs that have a good % of distribution funded by income from operations, since they would likely be more fiscally prudent and sound compared to the others (of course, depending on specific circumstances of each REIT). They will typically be paying around 7%, but the rate is usually fixed, so it could count for part of your bond allocation. there are other caveats with perferred stocks (they're callable, usually subordinate to other debt, etc.), which is why I try and do some research and stick with the relatively more fiscally sound ones with a sustainable dividend strategy.

A great free source for preferred stock listings is

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Old 07-22-2012, 12:11 PM   #3
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I have a small stake in O. Pretty popular REIT with retirees because it pays monthly dividends. Looks expensive to me at current levels.
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Old 07-22-2012, 01:01 PM   #4
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Originally Posted by FIREd View Post
I have a small stake in O. Pretty popular REIT with retirees because it pays monthly dividends. Looks expensive to me at current levels.
Great shareholder friendly company. The annual report and monthly newsletter are two of the best out there. I think the dividend is quiet safe due to their conservative management.

Morningstar says the fair value of O is $41 or roughly the current price. However I think the stock is too expensive and not worth much more than $33. If interest rates rise or we get a double dip recession the stock is likely to suffer. So the stock price is pretty dependent on a economy which is just muddling through. That said there are worse place to stick you money and get 4+% yield. I am still holding a modest size position. But when it dropped below 20 several years ago I backed up the truck.
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Old 07-22-2012, 03:21 PM   #5
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Great dividend payer!
However, it is expensive right now. There are a number of better dividend payers for the price.
I am also a bit nervous about how well they will do when interest rates start to rise.
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Old 07-22-2012, 03:50 PM   #6
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I have held O for many years, and also hold the two O Preferred Series O-PE and O-PF. Never had an issue with the monthly dividends.

The common has never missed a dividend payment and in fact has increased the dividend frequently - although only by a fraction of a cent each time.

If the common is too expensive, look at the O-PF series - about 6% yield, paid monthly, and backed by a very stable parent. Also has call protection until 2017.

The O-PE has risk of a call, which means the parent company can redeem it at $25.

I am most definitely satisfied with O, O-PF and O-PE.
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Old 07-23-2012, 01:57 AM   #7
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No, sorry.
Originally Posted by Quantum Sufficit View Post
Just wondering if anybody has done any business with this reit company, how safe is it?
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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Old 07-23-2012, 02:08 PM   #8
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I have traded this for several years. The price is high but I would assume that is because people have bought it for the regular returns. You may consider looking at the preferred options (OpE) which are cheaper. I'm waiting to confirm they also pay the monthly dividend and not quarterly.

A couple other Reits that I like are TWO and ARR which also pay well.

Good luck!

disclaimer: I own OpE, TWO, and ARR
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Old 07-26-2012, 10:04 AM   #9
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Here's an article you may find interesting.
Combining Realty Income And Covered Calls For A Winning Dividend Recipe - Seeking Alpha
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Old 07-29-2012, 04:52 PM   #10
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The main story of the Aug issue of the Morningstar Dividend Investor newsletter is on O. I'll quote rather extensively from the article, a free trial copy of the newsletter can be obtained here. (I highly recommend trying it for 30 days just for some of the additional info on MLPs and such).
The newsletter editor Josh Peters also has a somewhat dated book on dividend investing.

The M* Dividend Newsletter had two 100K+ portfolios Harvest has high yielding stock with slower dividend growth prospects. Builder has more blue chip companies with yields in the 3-4% range but with expected dividend growth in the 6-10% range.

I know there are many other dividend investor out there and found his analysis pretty interesting.

Of all the stocks we’ve owned over the years, none is nearer and dearer to my heart than Realty Income O. “The Monthly Dividend Company” is much more than a slogan; it’s the spirit that animates every decision Realty Income makes with shareholders’ money. Our very profitable history with the stock dates back to July 2006, when I bought 300 shares for our original Dividend Portfolio (the predecessor of today’s Builder and Harvest accounts) at $22.23 apiece. When
most other real estate investment trusts (REITs) were slashing dividends during the crash, Realty Income kept raising its dividend (albeit slowly). Through it all, we’ve more than doubled our money, earning
an annualized, time-weighted return of 17.6%.

However, as far as this performance is concerned, there’s been more going on than just our monthly dividends. My first purchase of the stock carried an original yield of 6.3%. Since then, dividend growth has averaged 3.7% a year. By our usual math—dividend yield plus dividend growth—we should have earned an annualized return of about 10%,
give or take. So where did the rest come from? As they say, a picture is worth a thousand words. The chart below compares Realty Income’s dividend yield to the yield on 10-year Treasury bonds. As the price of a fixed-rate bond goes up, its yield goes down, and vice versa. This formula is a little more complex for a stock seeing as how the dividend can change, but even a cursory inspection suggests a rather strong relationship. Except in 2008–09,when the crash sent interest rates plunging and even the highest-quality stocks got hammered, there’s
a strong relationship between falling interest rates and a falling yield (read: rising price) for Realty Income’s common stock. Given what has happened to interest rates, I think it’s fair to treat much of our hefty return as a windfall.
[A chart showing the high correlation between the yield of O and 10 year Tbonds is also included which I can't cut and paste .]

Our situation with Realty Income is hardly unique. Slow-growing Verizon VZ now yields just 4.4%, down from around 6.0% three years ago, and the stock now garners a big P/E premium to the market average. (As you might expect, AT&T T is in similar shape.) Regulated utilities in the U.S. look overvalued across the board, with only Harvest holding American Electric Power AEP trading below its fair value
estimate out of the 30 that we cover. Meanwhile, most REITs simply baffle me. Here we have a group of stocks once known primarily for their rich dividends, only to see three quarters of REITs slash theirs in the last recession. Scarcely three years on, valuations are at record highs and dividend yields are at record lows.

How about the tobacco stocks? Threats from litigation and regulation have subsided in the last decade and despite steadily declining volumes, the industry’s stocks have had a habit (pardon the cruel pun) of being undervalued and therefore over-profitable. In late 2009, when Altria MO traded at 10 times earnings and offered a 7.5% dividend yield, I overcame my long-standing skepticism and bought the stock. We’ve done very well since, but Altria now trades at a 4.6% yield and a forward P/E of 16. There’s no definitive way to trace the historic valuation of the purely domestic tobacco business that Altria has become, but for all I know, this is the richest rate the Marlboro Man has commanded
since the Nifty Fifty era.

Against all odds, we’re camped out at what has become Wall Street’s most popular intersection: low business risk and high dividend yield. With interest rates at all-time lows, an economy stuck in neutral at best, and the swelling ranks of retirees grasping for reliable income, it’s no accident that our style is now in style. Rising prices, though, can create problems—
not just for new buyers, but even for existing shareholders. What do you do with windfalls like this?

The bold section raise the very interesting question. With no offense to the OP he strikes me as part of the "retirees grasping for reliable income" rather a traditional stock investor.

I like Cramer more than most of the forum, and watch part of the show once or twice a week. Still I find it more than a bit unnerving that he hardly mentioned dividends back in the early 2000s and now days dividends get mentioned at least 3 times per show. When it comes to investing I never want to be part of the IN crowd.

I am curious how many others feel that dividend stocks as group are overvalued? And if so what do you do?

The specific analysis of the impact of rising interest rates to O is worth doing on other steady growth dividend stocks.

In fact, even the markup in a low-risk, high-payout stock like Realty Income may be justified ... if interest rates stay at today’s low levels. To value a stock, you need two pieces of information: a forecast of
future financial performance and a discount rate with which to evaluate future cash flows (dividends, in our case). The discount rate, or “cost of equity” as it is applied to a common stock, reflects what a reasonable investor would consider a fair return given the risks involved. Similar to the relationship between bond prices and interest rates, lower required
returns imply higher valuations and vice versa.
We recently reduced our cost of equity assumption for Realty Income to 8.0% from 9.1%; that alone accounts for a rise in our fair value estimate to $41 from $34. If long-term interest rates stay where
they are (1.5% on a 10-year Treasury), then an 8% total return from Realty Income might be reasonable, maybe even attractive.

However, over the long run, the yield on 10-year Treasuries typically has been equal to the rate of inflation plus 2.5 percentage points. A return to
these rates probably would correspond with faster economic growth. If and when such conditions return, investors may demand higher yields from stocks like Realty Income, which in turn could mean much lower prices. Problem? Or Opportunity? Just because Realty Income’s stock price is vulnerable to rising interest rates doesn’t make the stock a
flat-out sell. One of the core principles in our strategy is that as long as our dividend income is safe and grows over time by roughly the pace we expect, we don’t have to worry about fluctuations in stock prices.
Ordinarily, I cite this when the market is having one of its corrections: With a portfolio full of reliable dividends, a 300-point drop in the Dow Jones shouldn’t require me to cancel my dinner plans. But this point could work both ways: My expectations for Realty Income’s dividend hasn’t changed, so why should my view of the stock? I may not want to buy
the stock at these prices, or even reinvest the dividends back into the stock, but I could just let it ride.

Let’s say Realty Income’s dividend grows 4.5% a year for the next five years and by the end of that period the 10-year Treasury yield has doubled to 3%. Historically, Realty Income’s yield has run about 2.4
percentage points higher than the 10-year; that yield premium plus dividend growth is what investors get for taking the risks of owning the stock. For Realty Income to yield 5.4% at the end of this five-year
period, the stock would trade around $40 or so— not far from where it does now. But while our dividend growth would be offset by rising interest rates, at least we’d still be earning above-average income.
Furthermore, the spread between Realty Income’s yield and 10-year Treasuries could shrink—as it did in the last cycle of rising interest rates from 2003 to 2007—and give investors some decent capital gains.
Josh has buy price for O of $36.90.

It is also interesting to me that he has done at least twice as much trading in dividend portfolio the last few months as he typical does. The dividend portfolio anual turnover is around 25-30% . Tax consideration make my trading less frequent than his.
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Old 07-29-2012, 10:47 PM   #11
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Originally Posted by clifp View Post
I am curious how many others feel that dividend stocks as group are overvalued? And if so what do you do?
I agree that lots of investors are chasing yield and pushing up share prices.

The problem is figuring out whether it'll crash in August or whether it'll keep going for another two years.

I'll just keep selling covered calls and rebalancing...


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