Top Investment Choices at the Moment: Realty Income versus Altria
In the world of income investing, two heavyweight contenders stand out: Realty Income Corporation (O: 0.15%) and Altria Group, Inc. (MO: 0.20%). Realty Income, one of the globe's largest real estate investment trusts (REITs), boasts an impressive record of 127 dividend increases since its 1994 initial public offering (IPO). On the other hand, Altria, the leading tobacco giant in the United States, boasts an even more impressive streak of 54 consecutive years of dividend increases, earning it the coveted title of "Dividend King."
Realty Income offers a mouthwatering 5.5% forward dividend yield, while Altria outperforms with a jaw-dropping 7.2% yield. When considering total returns, including reinvested dividends, Realty Income's 105% gains over the past decade fall short of Altria's impressive 119% returns. However, before jumping to conclusions, let's focus on the future rather than the past to determine which dividend investment is truly superior.
Soaring with lower interest rates: Realty Income
As a retail REIT, Realty Income buys, leases, and shares the income from its 15,450 properties worldwide with investors. Its tenant base spans over 1,500 clients across 90 various industries. Realty Income is a triple net lease REIT, which means its tenants take on responsibilities for property taxes, insurance, and maintenance fees.
Its diversified business model, unmatched scale, and efficiency have enabled Realty Income to survive macroeconomic turbulence, such as the pandemic, inflation, rising interest rates, and other headwinds. During the 2013 to 2023 period, Realty Income's adjusted funds from operations (FFO) per share grew at a steady 5% compound annual growth rate (CAGR).
Even its top tenants, including Walgreens Boots Alliance and Dollar Tree, have faced struggles in the form of slowing sales and store closures. Yet, Realty Income manages to maintain a 98.7% occupancy rate in its latest quarter, with strong tenants like Walmart and Dollar General opening new stores to counteract the pressure.
Lower interest rates could benefit Realty Income, as it makes property purchases more affordable and encourages retailers to expand their brick-and-mortar presence. Moreover, Realty Income remains reasonably valued, trading at less than 15 times its last year's AFFO per share.
Altria confronts existential challenges
From 2013 to 2023, Altria's earnings per share grew at a robust 8% CAGR. However, this impressive growth was offset by declining cigarette and cigar shipments, which fell from 129.3 billion sticks to 78.1 billion sticks during the same timeframe. Its retail market share also slipped from 50.6% to 46.9%.
To counteract these tailwinds, Altria implemented a variety of strategies, such as price hikes, cost cuts, and share buybacks. Yet, it must continually innovate to maintain growth, particularly in the face of falling cigarette sales, increased taxes, competition from smaller brands, and the rise of e-cigarettes and other alternative nicotine products.
Altria's best chance lies in expanding its non-smokeable product offerings, including snus, nicotine pouches, heated tobacco products, and e-cigarettes. However, these efforts have been expensive and problematic, as evidenced by the U.S. Food and Drug Administration's (FDA) ban on Juul products in 2022. To recover from this setback, Altria purchased NJOY, an e-cigarette manufacturer, in 2023. While this acquisition will not impact cash flow until 2025 and EPS until 2026, it offers a promising opportunity for growth.
The upper hand: Realty Income
While Altria pays a higher dividend, its dependence on cigarette sales and stagnating revenue growth pose potential challenges. In contrast, Realty Income's robust business model, cognitive of macroeconomic trends, and lower volatile nature make it an attractive long-term income investment, even if it offers a lower dividend yield.
In the realm of investing, a wise strategy for those seeking reliable income could involve considering Realty Income Corporation's low-risk approach to finance. With lower interest rates, Realty Income's ability to acquire properties at affordable costs and encourage retail expansion could significantly boost its income sources.
In terms of finance management, Realty Income's diversified business model and efficient operation have allowed it to weather various economic challenges, including the pandemic and inflation, thereby underlining its potential as a secure investing option.
