Wednesday, July 7, 2021. The brokerage statements have been made available and the results are in. June was a great month for dividend income!
We received dividends from 30 holdings! They were, in alphabetical order: ABC, AFG, ANTH, AVGO, BIP, BIPC, BLK, BST, BSTZ, BTG, CCI, DLR, ES, FLO, FXO, HD, KRE, MAIN, MJ, Mon Fnd, MSFT, NSA, O, SCHD, SCHV, SII, UNH, UTG, WEC and WPM.
We received a whopping lump sum from AFG. I don’t know what that was about… Nor do I care. We just gladly take it! So because of that extraordinary dividend from AFG, the income looks like this for us. Our June income was 70.34% higher than from March just 3 months ago. Higher than last December’s by 48.38%, and did better than last September’s, 9 months back, by 198.91%… a near triple! Whohoo!!!
On a more realistic sort of a basis, I go to my stock program, where I can chart all issues as one, Price has hit a new all-time high in value today, as I type this… which makes sense, as the indexes are doing the same. One year ago, the average dividend per share among all our holdings was $2.81. As of this point in time, that average has risen to its present $3.09 a share, which is indicative of an organic growth of 9.96% these past 12 months.
In the month of June there looks to have been a dividend cut from FXO, from $.86 to $.83 a share. ETFs will fluctuate a bit like that, and is typically NO cause for concern. I see that IIPR has raised us from $3.84 a year ago to $5.60 in June, for a near 46% pay raise! KRE, another ETF has mildly cut us from $1.45 to $1.42 a share, as ETFs might. MJ, one more ETF, has also cut. This was from $.58 to $.36 a share. I should take a look. Maybe it needs to be culled out? I’ve got a healthcare related REIT that indicates it has cut from $4.41 a share back to $3.60. That doesn’t impress either. That makes 2 to take a harder look at. NSA raised us from $1.40 to $1.52 a share in June… not quite 10%, but I’ll gladly take it. O tries to raise only, and a little bit often. It’s paying another penny this quarter, from $2.82 to $2.83, and up only from $2.80 a year ago. SCHD has raised us from $2.09 to $2.19 a share, about 5%. SCHV has also raised us from $1.39 to $1.67, which is a nice raise of 20.14%. UNH has raised our pay in June, from $5.00 to $5.80 a share, and that is a lovely 16% increase! The utility fund UTG gave us an increase of $.12, from $2.16 a share to $2.28.
It’s all good! The projected earnings increase among our holdings, looking out into the future, looks to be a possible or potential 15%, but I put little stock in such prognostication. Divided growth is projected to be on the order of 12% a year, looking out there. That’s a lovely number that would double our income in 6 years! If it also poses a “dividend magnet” effect upon price, it will follow suit… especially if interest rates continue to remain low.
Our current portfolio dividend yield stands, as of now, at 3.87%, and rising. How long before we are generating a portfolio yield of 4%??? May not be long! That would be a great milestone… where else am I going to earn a 4% yield?
Monday, June 14, 2021. I had a reader question me about my level of cash… and I knew in one sense, I was “caught with my pants down,” in the sense that I really, simply, did not know for a certainty what my actual asset allocation was… so, I accepted the personal challenge to find out just what it REALLY was. And here is that real-world tally.
This is either really good… or it is really bad. But in either case, it seems to be working perfectly well for us right now. The wife and I are 1.) 41.03% cash, 2.) 16.71% cryptos, 3.) 18.58% precious metals in its various forms, 4.) 6.56% the metal commodity Iridium, and all of 5.) 17.11% common dividend-paying stocks, which in actuality isn’t really too very much at all, as I can now plainly see.
So, what should I conclude from this exercise? I want to hold right where I am. Our 1.) cryptos, should they launch hard in the near future, (and they’ve already better than tripled in less than one year), might actually make us wealthy. Our 2.) precious metals, in all its various forms, are simply all about practical ‘insurance’ in incredibly uncertain times. Our 3.) Iridium position has also more than tripled in less than 6 months, and we want to hold until at least 1 year has passed for the lower cap gains tax. And, finally, our 4.) safe-dividend growing common stocks are not only producing stellar portfolio dividend income growth, but it would appear that their capital appreciation is also beating the market… which is not at all unusual, as those safe-dividend growers that raise their dividend by more than 10% also have this incredible penchant for creating the “dividend magnet effect,” whereby safe-dividend growers have this powerful tendency for pulling their share price up by an amount similar to their regular annual safe-dividend growth… and if that increase is in any sense greater than the price appreciation of the market… so, to that same extent, does the share price of our holdings rise greater than the market average!
Since capital growth is by no means our first concern, and since, also it will have to be the cryptos and the metals that will have to make up the bulk of our future capital growth, as I strongly suspect they will, I feel incredibly comfortable and confident that we are right in that place that we want to be… and, I would not be interested in changing a thing right now.
If anything, this exercise in determining what our actual asset allocation is tells me that we are in a very good place, and that, if anything, I should wait for a considerable stock market smash, and put a goodly amount of cash to work in more shares of our safe-dividend growing shares. What is anyone else thinking at this time?
Saturday, June 12, 2021. I haven’t written of such things in a while, but NOW is certainly a good time to do so.
IF you are a beginner, a novice, new to investing… you’ve come to the stock market at one HECK of a time. I’m sorry. But here’s the simple truth… The stock market, in general, and I am referring to the entire thing, and not every stock in particular, is at an extremely high valuation by just about any measure that has been contrived… and not only are these measures at extreme highs, but they are all at NEW ALL-TIME, NEVER-BEFORE-SEEN HIGHS! That’s NOT a good thing…
Pay close attention to the following:
“Three Valuation Metrics Signaling High Risk Today
The Most Reliable Historic Measures of All-Time-High Valuation
The first and simplest metric signaling higher risk in stocks today is the S&P 500 Index’s price-to-sales (P/S) ratio.
Historically, this ratio has been highly negatively correlated with subsequent 10- and 12-year average annual returns. That means that when the ratio has been high, stocks have tended to perform poorly afterward. When it has been low, stocks have tended to perform well afterward.
Within the past few years, the P/S ratio has peaked twice just months before a large correction.
As you can see in the following chart, it peaked around 2.34 in January 2018 (its highest level since the dot-com high in March 2000). The S&P 500 then fell nearly 20% starting in late September, bottoming on Christmas Eve. In January 2020, the P/S ratio peaked again at 2.30. One month later, the S&P 500 began its pandemic-induced tumble, closing down 34% by March 23.
The P/S ratio hit a new all-time high of 3.14 on April 30, just over one month ago. It’s still very near that level today.
The second important valuation tool for the overall stock market is the ratio of total market cap to gross domestic product (“GDP”). This metric gained in popularity after the father of value investing Ben Graham taught it to his star pupil, Warren Buffett.
At the top of the housing bubble in June 2007, the indicator stood around 1.06. At the top of the dot-com mania in March 1999 – until recently, the single-most-expensive moment in U.S. stock market history – it was at 1.5.
Today, it stands at an all-time high of 1.98.
The Hussman Funds
The third metric is really a group of five market-valuation metrics that economist and portfolio manager John Hussman tracks at Hussman Funds. (P/S is one of the five. I presented it separately in this writeup because it’s the easiest for you to track independently and the easiest to comprehend.)
Hussman found these five metrics have the highest negative correlation with subsequent 10- and 12-year S&P 500 returns. When the metrics have been high, subsequent returns have been low and vice versa. Right now, they’re at the highest levels ever recorded.
Either all these metrics are broken, or right now is one of the single-riskiest moments in stock market history.”
But wait, as they say… There’s MORE!
“Three Measurements of Investor Sentiment
Now let’s turn to investor sentiment. This is hard to quantify, but it boils down to a simple observation of human nature: Investors tend to be most bullish after stock prices have risen and most bearish after they’ve fallen.
Being bearish most of the time is a losing proposition… Equity prices have tended to reflect humanity’s ongoing progress, rising over the long term and providing risk takers with adequate returns. But every decade or so – usually after a period of excellent returns like the market’s 65% run-up since last March – investors get very bullish when they should be more cautious or even outright bearish.
Let’s look at three sentiment indicators flashing “high risk” lately…
First, there’s TD Ameritrade’s Investor Movement Index (“IMX”). This is a proprietary, behavior-based index based on a sample of the firm’s 11 million funded client accounts. The sample changes each month and encompasses all ages, account sizes, and experience levels. The IMX data go back to 2010 and have been higher only once – in late 2017, roughly a year before the near-20% correction of late 2018.
Second, there’s the Goldman Sachs Bear Market Probability (“BMP”) Index. This index is constructed monthly from five inputs and ranked by where it stands against all historical readings. The higher the indicator, the higher the chance of an impending bear market.
As you can see, the BMP Index hit nearly 80 (“0.8” on the following chart) in November 2018. That was the highest bear market risk in 50 years. The market took a dive not long after. Today, the index is at 65. That’s not great, but it’s not disastrous. If it hits 70 soon, that will be cause for much greater concern.
Overall, the probability of a bear market is historically above average and rising.
The third investor sentiment metric isn’t a metric at all. It’s an opinion based on a chart by technical analyst and author Justin Mamis that represents changing investor moods over a full bull and bear market cycle.
The “buy the dip” moment on this chart came in March 2020, when stocks plunged as the pandemic began. Right now, we are at or near the “enthusiasm” moment again – the single-riskiest moment in the cycle…
This is purely an opinion, of course. There’s no objective method for determining where on Mamis’ chart the stock market is at any given moment. Perhaps I’m wrong, and we’re merely at the “anxiety” phase. It’s impossible to be certain. That’s why we don’t base our strategy on the accuracy of our predictions but rather on our ability to prepare for a wide range of outcomes.
So What Should You Do About This Heightened Risk?
The heightened risk we see in the overall market does not mean you should sell stocks. Selling stocks right now would amount to a prediction, and we don’t do predictions.
What you should do is maintain a diversified portfolio that prepares you for great long-term returns and wealth preservation.
Any reader who has taken our advice about portfolio construction is already prepared for a wide range of outcomes in the financial markets, including the possibility of an extended bear market.
We’ve been advising readers here, in the Stansberry Digest, and on the Stansberry Investor Hour podcast to hold a “truly diversified portfolio,” which contains four core elements.
Stocks (50% or more of your liquid assets)
Plenty of cash (20% or more)
Gold and silver (10% or more)
A small amount of bitcoin (5% or less)
The percentages are suggestions. They don’t add up to 100% because there could be other assets you might want to include in your portfolio, like real estate, art, or other stores of value that you know well. Only you know what kind of investor you are and what makes sense for your personality, risk tolerance, and goals.
Investing style and asset allocation is a personal decision and requires experience and self-knowledge. So we won’t predict tops and bottoms. But we will help you stay diversified, including keeping a steady stream of new equity ideas flowing into the stock portion of your portfolio.”
I thought the above advice was truly incredible! As for ourselves here in our household… we are like, and these are rough guesstimates, not actual calculations, (I could take the time to get some exact numbers, but it doesn’t strike me as being worthwhile) some 24% in stocks, maybe 18% precious metals in all its forms, nearly 40% cash, some 12% in cryptos, and some 6 or 7% maybe in a commodity trade in Iridium. This all comes out to around 100%. Maybe I’ll do the hard work of figuring it all out to the 10th of a %, but I’m just too busy at this time.
Thursday, June 10, 2021. Found this piece in my inbox this morning. I love this stuff, because I know it’s all true. I’m personally living it, and I ‘preach’ it to others. THIS is the way to be a good investor.
“The truth is that dividend payments generated by a modest investment might seem inconsequential at first. But through the magic of compounding, it won’t take long before they can begin to make a dramatic impact.
You see, when you buy shares of dividend-paying stocks, the dividends they pay can be used to purchase more shares, leading to increasingly larger dividend checks. These larger checks can then be used to buy even more shares and so on. In time, even a small stake in such stocks can grow into a tidy sum.
Let me show you just how powerful dividend compounding can be.
Let’s say you buy 1,000 shares of XYZ Corp for $10 each — that’s $10,000 invested. If XYZ pays a 5% dividend yield, you would expect to receive $500 in dividends in the first year.
Now, rather than simply pocketing that $500, imagine if you purchased 50 more shares instead.
Of course, those 50 new shares would then generate dividend payments of their own.
So if you reinvested your dividends and left your investment alone for the second year, your 1,050 shares would generate a little more than the first year — $525 in dividends.
If you reinvested those dividends to buy 52 more shares for the third year, your 1,102 shares (1,000 + 50 + 52 = 1,102) would pay you even more — $551 in dividends.
Fast forward through 30 years of dividend reinvestment, and your original 1,000 share stake in XYZ would have more than quadrupled to 4,322 shares.
Wait, It Gets Better…
Of course, that’s a simplistic example. You would hope your shares would gain value over time rather than just stay at $10 per share.
So to complete this example, let’s say XYZ’s stock price gains 8% per year — which is right around the historical average for the broader market. And let’s say the company raises that dividend by a modest 3% per year, on average.
Again, let’s say you take those payments and you reinvest your dividends every year. How much would you make?
As the table below shows, this steady compounding process can yield amazing results over the long haul…
Your original $10,000 investment would have swelled to more than $200,000, without ever adding another penny!
But what would have happened if you didn’t reinvest dividends? The stock would still be worth about 10 times more than what you paid, thanks to capital gains. But without any reinvestment you would have only collected a measly $24,000 in dividends and you’d be left with the same 1,000 shares.
Bringing It All Together
Granted, this is just an example. And not everyone has 30 years to compound their money like this. But on the flip side, there are plenty of stocks that hike their dividends by a lot more than 3% a year, too.
Either way, the results are clear. Successful investing for the long haul is really nothing more than a game of compounding by earning a consistent return and reinvesting your profits back in the market over and over again. There are no shortcuts.
But here’s the fun part… When your portfolio is large enough, you can stop reinvesting and live off the dividends as a second income.
Compounding gives you more time to enjoy life. You don’t have to be glued to CNBC or your computer screen, looking for the next “hot” stock. And you don’t have to worry about what’s going on in China or Russia or the Middle East, either. Your portfolio remains largely unaffected.
The magic of compounding is most powerful when an investor focuses on established companies that throw off a steady stream of dividends. Simply find dependable companies that pay steadily rising dividends, reinvest your payments, and let the math take care of the rest.
That’s why I spend some of my time searching for steady dividend paying securities. Choose to harness the power of dividend compounding to maximize returns over time.”
As you may know, we only reconstructed our safe-dividend growing retirement income generating portfolio only last September, and already our portfolio dividend yield is approaching 4%. Our dividend income is rising all the time, and I measure the rate of that growth quarter-over-quarter, year-over-year, and we are on our way to a financially secure retirement.
Friday, June 4, 2021. Our May monthly brokerage statements have been posted, and I’ve updated our file. So how’d we do?
Only awesome! First, we received payment in May from 17, or 1/3rd, of our 51 stock holdings: ABBV, APO, BMY, BST, BSTZ, CCOI, CVS, EVA, INVH, LEN, LNT, MAIN, Mon Fnd, NEP, NHI, NXST, O and UTG. Our portfolio dividend income is 31.6% higher than it was last November, 6 months ago, and even 21.7% higher than February just 3 months ago!
We’re on a tear! Issues that reported a raise or cut in the 1 month charts are 1.) APO, down from $2.40 to $2.00 a share, but still paying us a 4.13% yield. 2.) CCOI, raised from $2.87 to $2.97 a share, for a 4.31% yield. 3.) COR has raised from $4.92 to $5.08 a share to yield to us 4.18%. 4.) EVA has raised us from $3 a share to $3.11 for our current 7.54% yield. 5.) FLO has raised from $.80 to $.84 to yield for us 3.65%. 6.) NSA has raised theirs from $1.40 to $1.52 and our yield on investment is now 4.06%. 7.) SCHV has raised theirs from $1.39 to $1.68 to presently yield 3.23%. And 8.) WPM has raised to us from $.52 to $.56 a share. As this is a dividend paying portfolio precious metals ‘insurance’ holding, the dividend yield is now 1.52%.
A favorite way to look at our progress is to chart all 51 issues as one average of them all. The dividend payout line for the past twelve months starts with an average dividend per share for all as being $2.78 a share, but with all of the increases by raises from our holdings, the average dividend per share now stands at $3.08 a share. This $.30 a share average increase is a 10.8% pay raise. The projected dividend income growth calculated by the program I use expects that it will continue to do so at an average annual 12% rate, which would double our income in 6 years time.
Our actual portfolio dividend yield at this time is 3.87%. If it should double in 6 years, that yield would be 7.74%! Where are you going to find a dividend income yield like that anywhere? You won’t! And that’s why you’ve got to start building a portfolio dividend income type stock investment portfolio that will just keep paying and paying and raising and raising! The sooner you commence, the sooner you will attain unto your retirement income goal!
This is passive income stock investing. You buy issues that have the very best profile of price and dividend income growth. You create a compounding growth machine, and a “dividend magnet effect” that results in price appreciation, as individual issues raise their dividend, and the stock price rises to reflect both the growth and the safety of that growing dividend.
We’re on our way to becoming stock market wealthy by means of dividend income, its growth and reinvestment into more shares. It is the very best way to create stock market wealth, as well as a passive, growing retirement income stream that never has to end!
I’ll even add this one other thing, too… Even though we do not purposely seek to invest for capital growth, capital appreciation… that matter has a way of taking care of itself. Why do I say that… our holdings closed at a new all-time high in value today. The indexes did not. Our holdings typically beat the S&P 500 for price appreciation, because it always beats the 500 for dividend growth and safety!
Saturday, May 22, 2021. Saw this in my email inbox. I had to share this with you all!
“The Incredible Power Of Dividends… In One Chart
I run across a lot of charts and graphs on a daily basis. After all, as a Chief Investment Strategist, it comes with the territory.
Only a few of them really grab my attention. But I found one that I like to trot out every year or so to share with anyone who questions whether income-paying stocks belong in their portfolio.
When I show people this chart, I don’t really have to argue why I’m a believer in dividend paying stocks anymore. This chart makes a compelling case all on its own.
Once you see it, you’ll understand. If you’re not taking advantage of dividend payers, you’re missing out — not only on the income, but serious long-term gains as well.
Don’t believe me? Here’s the proof…
As you can see from the chart above, share price appreciation would have turned a $10,000 investment in the S&P 500 in 1970 into $350,144 by 2019. That’s a handsome return by any accounting. But add reinvested dividends to the picture, and the same investment would have blossomed to $1.6 million, nearly five times as much.
In other words, reinvested dividends have accounted for 78% of the market’s total returns over the past half-century. That remarkable statistic doesn’t need any embellishment — it speaks for itself.
I’ll say it again: If you’re not investing in dividend stocks, then you’re missing out on the market’s strongest wealth-creating opportunities.
Dividends Are Great Again
The relative contribution of dividends has varied dramatically over the years. Back in the stagnant 1970s, quarterly distributions accounted for a hefty 73% of the market’s return. But in the high-growth 1990s, they represented a much smaller 16%.
I remember that period well. I was a financial advisor at the time, and dividend stocks (and funds) were a tough sell. Many of my clients considered them a quaint relic in the dawn of a new Millennium. Why get excited about a modest 3% to 4% annual income stream? Tech stocks could do that in a single day.
Instead, I got orders to buy high-fliers like JDS Uniphase, which rocketed past $1,200 per share in 1999. You may know the rest of the story. Like most others, it collapsed in the dot-com crash a year later and lost 99.9% of its value before rebranding. That was a painful lesson for many investors.
But we are once again in an era where dividends account for a meaningful chunk of the market’s performance. I think that will be even more true as we recover from the recent selloff brought on by the coronavirus epidemic. And if there’s one thing better than a steady paycheck every 90 days — it’s a growing one.
Dividend Raisers Crush The Market
Obviously, dividend hikes put more cash in our pockets almost immediately. We can see and measure the impact. But that might not even be the strongest argument for investing in these stocks.
As I’ve said before, a distribution increase sends a bullish message. After all, businesses don’t lift their commitments if they’re expecting earnings to falter. Higher dividends typically reflect an upbeat cash flow outlook, which often precedes a rising share price. So dividend raises not only boost our income, but they can also foreshadow potent capital gains.
Well, we also have some good data on this subject courtesy of Ned Davis Research. Between 1972 and 2017, dividend-paying stocks outpaced non-payers with average annual returns of 9.25% vs. 2.61% for the non-payers. But a deeper look beneath the surface reveals a fascinating dichotomy.
The study separated all dividend payers into distinct groups: those raising payouts over the previous twelve months, those cutting or eliminating payouts, and those maintaining payouts with no change.
No surprise, dividend-cutters performed worst, and dividend-maintainers did better. But dividend-growers delivered market-crushing gains of 10.07% annually. That’s about 230 basis points ahead of the S&P 500 — with less volatility.
If you’re already in the market and own a few dividend payers, then I’m probably not telling you anything you didn’t already know. Dividend hikes are good for investors; that isn’t exactly an Earth-shattering revelation. Still, it’s reassuring to attach cold-hard numbers to long-held beliefs.
But it’s still a good reminder of the power behind owning proven dividend raisers in your portfolio. That’s especially true in times like this. After all, the coronavirus pandemic (and the ensuing downturn caused by it) is revealing which companies are truly positioned to stand the test of time for longtime investors. And if this data is any indication of what the future will hold, the dividend raisers will be the winners.
That’s why I continue to we continue to be on the lookout for dividend raisers. Not only are we locking in goodly yields now, but we’ll be sitting on serious long-term gains that will pay more and more with each passing year.
And, you know me, I am ONLY all about these safe-dividend growers, and my average annual return, including my dividends outperforms the S&P 500 nearly every single year, and with less volatility… all this while being a rather passive, buy-to-hold, long-term investor. I’ve got better things to do with my time!
Thursday, May 13, 2021. I’ve updated the timer… The OEXpert 7 Stock market Timing Program, and I am getting excited! I smell opportunity coming our way.
Does the OEXpert 7 Stock Market Timer have any news for us this evening? The price of the QQQ is in its 2 lower trading bands for a signal. F1 is now at 10 and that is a signal. The always first and early F2 is signaling. F3 is now at 37… Needs to reach 10, but does not have to participate. Always a plus when it does. F4 is now at -18 and close. If Friday were to go lower, it would most likely signal. F5 looks to be right at 43… only needs to touch 40. One more day could do it! Then, F6… it’s at 8. It is signaling, but it would be wonderful if it were to get just a little bit lower. It’s always at its best when it touches 0.
I’m looking to tomorrow to hopefully go in just such a way as to wring that last little bit out for me, so that I could confidently say it is due. But, it needs just a bit more. Will we get it? I’m telling you that I think it is immanent. Will it be Friday? Monday???
Wednesday, May 12, 2021. I don’t have much time, so here goes…
The OEXpert 7 reads as follows, as I time the QQQ. The price is right into its lower trading bands, and that counts as a signal. F1 looks to be at 12 or 13, and is so close, another day would do it. F2 being first and early is there. F3 is slow and often late, but it is falling straight down, and is now at 41. A 10 would nail it, if it’s going to get there. I’m not counting on that. F4 is a -14, and with F1, another day, or maybe 2, would set that all up. F5 reads 50. I need a 40 to signal, and I could see that requiring one, but likely 2 days, to get there. Finally, F6 reads 9 again today. Love it when it gets just a bit lower, so again, one day or 2 could make that a solid signal for me.
I’m looking at a few others things, and they are doing the very same… getting ever so close, but requiring another day or two to finally find their home, and tell me that risk is low and an opportunity is beginning to knock.
So, my conclusion is that a reversal is immanent. I could see it happening in the first half of next week perhaps. This weekend, especially if Friday were also to bring some pain, I’d start drawing up my shopping list, and give consideration to more shares of favorites, and maybe some new positions in others.
Tuesday, May 11, 2021. Well, I’m watching all this selling going on for awhile now, and I thought I’d update the OEXpert Stock Market 7 Timer. My interest is in the tech sector, which has been really taking it on the chin here lately.
So, as of today’s close, The bottom of the price move has tagged its lower trading bands, and is really close to being a signal. F1 is under its lower trading band and is reading a 19… Technically, that is a signal. Of course F2 has signaled… it’s always first and early. F3 is at 52 and dropping like a rock. It’s halfway. F4 is a -10, and would require a few more days to get to the requisite -20 or so to signal. F5 is reading a 54, and could also get to 40 to signal in a week. F6 is 9. It doesn’t need much more… a day or two, and it would give a solid signal.
My take is this… I believe this market could find a bottom within the next week. I need to watch and update daily. Risk is coming out rapidly, and we need to watch for the turning day… between now, and maybe this time next week… the 18th or 19th maybe.
As I update daily, I hope to get a clearer view of what might be ahead… as always, some word of news could reverse the course on a dime, and before the indicators get there…. Should that happen… BUY IT!!! I will.
Friday, May 7, 2021. A word about a favorite, buy-and-hold-forever idea, Realty Income, symbol O.
“Realty Income (NYSE: O) – When I first recommended Realty Income to readers back in August 2013, it owned just over 3,000 rent-earning properties across the country. Today, the portfolio has more than doubled in size to 6,592 properties.
Incidentally, 6,452 of those buildings are currently leased, for a robust occupancy rate of close to 99%. Most of these free-standing properties are leased to essential businesses (gas stations, pharmacies, supermarkets, convenience stores, etc.), so Covid only dealt a glancing blow.
More tenants equal more cash flow. When Realty Income was first added to the portfolio, it was generating $274 million in yearly adjusted funds from operations (AFFO). Now, the company is posting $297 million in cash flow per quarter. I don’t normally compare quarters to fiscal years. But that’s the point: Realty Income is hauling in more profit in 90 days now than it did in an entire year back then.
That explains why it has been able to relentlessly increase dividend distributions… for 93 consecutive quarters.
On average, Realty Income has been purchasing about 385 new properties annually, expanding its empire block by block. At that pace, the portfolio would hit 10,000 properties in 2030. But something has just accelerated those expansion plans – and this milestone will now be reached in the next 3 to 6 months.
You guessed it: an acquisition. Realty Income has just unveiled plans to acquire VEREIT (NYSE: VER), creating a $50 billion juggernaut that will be the nation’s sixth-largest real property owner.
This will be an all-stock transaction. While debt is cheap, you can’t fault Realty Income for using its shares as currency to close this deal considering they have climbed about 40% over the past 12 months – and the fact that they trade at a premium to NAV (net asset value).
Needless to say, the union of these two real estate owners will drive AFFO higher in dollar terms. But there will also be many more shares outstanding after this transaction. The question is whether the deal proves to be accretive or dilutive on a per-share basis.
Fortunately, it appears to be the former. Prior guidance called for AFFO of $3.46 per share in 2021, which would have been a tepid increase of just 2%. Now, management is forecasting this key metric to increase by more than double-digits to $3.80 per share – raising the ceiling over the annual dividend, which now stands at $2.82.
I don’t always like mergers in this space because they can misdirect a company’s core focus. In this case, Realty Income is known for being a retail landlord. Not just any retail, but preferably non-discretionary sectors that don’t face online competition… renters like Taco Bell, Circle K, and Family Dollar.
VEREIT owns many of these as well, but also has a less attractive segment comprised of 100 office properties leased to financial firms, insurance companies, and others. While rent collections in this segment are strong (99%+), I am still glad that these office properties plan to be spun off into a separate entity.
What’s left will be 10,300 single-tenant properties, nearly half of which will be leased to dependable investment-grade renters.
Action to Take: As with most tie-ups, this merger will increase the company’s scale and yield considerable cost savings synergies – about $35 million per year. With the strongest credit rating in its peer group, Realty Income will also be able to shave off interest expenses by refinancing VEREIT’s debt under better terms.
Not only will the accretive deal lead to larger dividends, but it will also enhance the “durability” of those payments. With largely complementary customer bases, the pro-forma $2.5 billion annual rental income stream will come from well over 50 separate industries, minimizing a downturn in any one group.
The market likes this pairing, with both the acquirer and the takeover target rising on the news. With 600 straight monthly dividends, Realty Income remains the textbook definition of a “Lifetime Wealth Generator”.“
This is just one of those you buy and hold for life, or longer. Real estate can never go to zero, and in inflationary times, its value goes UP. I own some, it’s not a rocket ship, but a true “Steady-Eddie.” It should be in the core of any safe-dividend growers’ dividend income portfolio holdings!