Why does this stock always feel expensive?

“Quality is what you remember when the price is already long forgotten”.

I must confess, I really like that quote, but not at the time of buying! Unfortunately, some quality stocks feel always expensive and they seem to stay out of reach forever.

This is exactly the case with the stock I’m talking about today. The last time this stock traded at a relatively fair value was during the depth of the 2020 COVID-19 crash.

There was only a short window to buy some shares and it was over before I was able to blink my eyes.

stock price crashed during covid-19

That’s another good reason to always have your watchlist with high-quality dividend stocks prepared. You never know when the next stock market crash will be.

At that moment in time, you might either be struck by fear or overwhelmed with all the choices you have.

Hence, preparing your list upfront during peaceful times is definitely recommended.

Having said that, the stock I’m talking about today is Realty Income ($O). You probably guessed that already from the share price as it’s one of the most popular dividend growth stocks in our community.

And that should come as no surprise as it has been growing its dividends for 27 consecutive years!

It is a company with a lot of pride as it calls itself the “monthly dividend company”.

Dividend Income

Hence, this post triggered me when I received their most recent dividend payment. I don’t know what it is with Monthly dividend income, but it has something special to it. Would you agree?

Thinking about it, it’s probably the closest form of passive income compared to my active income from my paid job.

Having said that, this month I received a $15,78 dividend payment on my DEGIRO account.

account statement

Some of you might remember that there was some trouble with REITs and DEGIRO in 2020 which resulted in a 30% dividend tax. This was only temporary; as you can see, it has been fixed.

My thoughts on Realty Income

I was really hoping that the current inflation numbers and resulting interest rate hikes would impact the stock price.

However, this couldn’t be further from the truth, because it’s only down 2.22% year-to-date. This easily outperforms the majority of all stocks listed in the United States, even big tech!

But it also comes at a price, because the stock currently trades at a 19,17 price to funds from operations (P/FFO).

In itself, this is not an extremely high multiple. However, I would expect REITs to trade at a 15 multiple during these kinds of times.

Although, I must confess that we are talking about a very well-managed and high-quality company. In its essence, it’s a triple net lease REIT.

This means that the tenant has to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. This is on top of the normal rent and the utilities like electricity and gas.

In other words, there’s limited downside tenant risk. The risk is rather in the property locations and the credibility of their tenants. And also, in this case, the company is very conservative, because the entire Walgreens account is a maximum of 4% of the entire portfolio.

source: https://www.realtyincome.com/our-portfolio/portfolio-diversification-overview

And honestly, I could go on about many other aspects of their business and strategy, but I would rather advise to have a look at their investor presentation.

You will read that they aspire is to be a top 5 REIT in the United States and it should be possible if history is of any guidance.

They are not that present in Europe yet and an expansion on our continent is one of their major growth opportunities. Why not, right?

Having said that, this is probably the reason why their stock always feels expensive.

It’s a very conservatively managed business with very predictable growth. It pays a safe monthly dividend and has ample opportunities to expand.

Hence, that’s why I feel that there are hardly any opportunities to buy their shares at an attractive price.

However, I’m already proud that I was able to buy some shares in the aftermath of the initial stock market crash in 2020. I was still able to initiate a position at ~49 USD.

As you can see, afterwards I’ve mainly been averaging up and using the opportunities when it dipped below 60 USD.

Realty Income portfolio acquisitions

Nevertheless, I still believe the company is overvalued when comparing it to my discounted cash flow calculation (using AFFO, see stock analysis on a page below).

But I must confess that I am a bit impatient and afraid that we will never see it drop to that price.

That’s why I made a small exception for Realty Income. I rather treat it like a bond, and I expect it to grow its dividend by 3.5% annually.

It’s still a relatively small position in my portfolio, although it’s a Tier-1 company. In other words, it has ample room to grow and I still expect many transactions to follow in the next 5 years.

Let’s just hope for much better prices than where it trades today. It should be possible, right?

Yours Truly,

European Dividend Growth Investor

Realty Income stock analysis on a page

Realty Income stock analysis on a page
Realty Income Stock Review on a page – ignore some of the red-flagged numbers as they don’t matter for a REIT. FCF = AFFO in this picture.
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European DGI

I am European DGI and it's my desire to retire early via Dividend Growth Investing as a passive income stream. This is not easy and especially when living in Europe. That's why I started this blog because I truly believe we can learn a lot from each other by sharing our journeys!


I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. I’m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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