Realty Income (O)… Is It Overvalued?

This is a guest post by Passive Income Dude

Ah, Realty Income. The dividend stalwart that all dividend investors love. The company with 23 consecutive years of higher dividends. The safe haven that money flocks to when markets are volatile. The company that trademarked the slogan “The Monthly Dividend Company.” The company that has paid 551 consecutive monthly dividends, spanning 45 years.


Despite its undoubtedly impressive record as described above, and as much as we love this company for the passive income it consistently provides each month, given its recent price at $69.91 is it time to consider that Realty Income may be overvalued?


I would say yes. Realty Income is up around 35% this year. Stop and consider that. 35%, when the S&P 500 is only up 5% or so. Realty Income trades at 24 times 2016’s expected FFO (funds from operations) and has a twelve-months-trailing P/E ratio of 65. This shouts overvalued to me. O has not had a higher P/E ratio anywhere near this in the last 10 years.


If there is still doubt, consider the following:


1) Morningstar currently has it rated with 1 star.

2) Yahoo Finance (which I get, is just that, but still) states that it has a 1yr target of 60.67.

3) Morningstar’s “consider selling” mark is at 68.85, which O blew past when it was recently trading in the 70s.

4) Do we really think that O has created 35% of sustainable company value in just six months? And if so, do we really think that there is more left to make this an attractive investment at this current price?

5) And finally, if you enjoy doing any technical analysis, the chart below shows it is overbought as well:




All of this pains me to say it because I love O, and actually own some shares myself, though it is now my smallest holding.


With a yield of just 3.34% (even after its near 2% pullback that it recently had on Friday), there is not enough value left to tempt me at current prices.


In closing, despite its consistent dividend, most of us need to think about total return for our investments (and those that don’t need to, still should think about it with their new capital). Remember, that is dividend yield + capital gains/losses for our investment return. Do not expect too much more in terms of capital appreciation, though with low interest rates it could continue higher for the short term, but again, even its yield is relatively low at current prices. This all suggests a low future return.


What do you think?

If you would like more investing commentary and insights, please visit Passive Income Dude where I share my journey to financial freedom through my own disciplined dividend and real estate investing. Thanks for reading!

21 thoughts on “Realty Income (O)… Is It Overvalued?

  1. I’m an owner of O and was seriously selling my shares to take a profit and reevaluate. Your post really drives that home for me, as it has been performing incredibly on the market, but got to the point where I could see myself taking a profit and looking elsewhere. I’m not sure if I will yet, as it’s only a small position, but now your post really has me thinking!
    Special Agent Dividend recently posted…Recent Investment Activity – DGI PortfolioMy Profile

    • Thanks MrStockFox! Good to know there are others who feel the same way! I just can’t see there being many ‘new’ buyers at that yield, but crazier things have happened in the short term. I think O is still worth holding, just at a smaller weight and no new capital. Cheers,

      Passive Income Dude
      Passive Income Dude recently posted…Income/Expenses: June 2016My Profile

  2. Great article DivHit.
    Realty income is not a REIT I’m particularly familiar with, being a Brit, but like quite a number of REITs, it has certainly benefited from the whole rates ‘lower for longer’ mantra.
    I wonder if there has been any research done on the interest rate sensitivity of O since it has been through quite a few interest rate hiking / cutting cycles over the years.

    • Hey Financial Monkey, that is a great question about interest rate sensitivity and I don’t think I know off hand. If I remember correctly it is less sensitive to interest rate moves than other REITS (like NLY or ARR). Can someone confirm?

      But you are right in it benefiting from interest rates declining. So has the entire bond industry. To bubble levels in my opinion! Where is return going to come from with bonds??! Keep in touch,

      Passive Income Dude
      Passive Income Dude recently posted…Income/Expenses: June 2016My Profile

  3. Sold O at $61 and got some flack for it… Deservedly so since its put on another $10, but I have no regrets. I moved the funds to OHI and RAI both at lower levels than they currently are so i have not missed out on much gain from O comparatively speaking. OHI is around 11 FFO with a 7% yield that was just raised .02. 9% growth yoy, i feel safer in that stock right now. To each their own and thats what makes a market!
    American Dividend Dream recently posted…A lot of Updates – Part 2 – Recent Buys!My Profile

    • Hi DFG,

      Looks like many are selling that name in recent weeks. Guess it’s not always about passive income when valuations become too excessive.

  4. I really wanted to initiate a position in O but it has been pumped pretty high lately. Good to know that it is overvalued and perhaps others will recognize this and sell. Once the sell off happens, perhaps I can initiate a small position. Also, I plan to buy in my 401k brokerage link account to avoid the monthly taxes. Thanks for the article!
    Dividend Liberty recently posted…Dividend Liberty Application Update (July 2016)My Profile

    • Div Liberty,

      O doesn’t have much “reasonable” room to go any higher. Think of it from the new investor’s perspective: When you see it trading at its 52week high, already up 30something% this year, with a yield of only 3.32%, are you as enticed to buy? From your own wise admission, no. 🙂 hence, supply and Demand laws will follow brotha! Thanks for the comment!

      Passive Income Dude
      Passive Income Dude recently posted…Recent Sell: American Electric Power (AEP)My Profile

  5. I don’t think I’d want to sell such a reliable dividend payer (especially in this economically volatile world we live in), but I agree completely on it being WAY overvalued. I remember when it was $15/share. Do you know how quickly I’d start buying the hell outta that if it were that price right now?

    I think this comment illustrates why it’s at such a high price. No one wants to part with it.

    Great post, Dude!

    ARB–Angry Retail Banker
    ARB recently posted…Why Is Everything In Retail Banking A F***ing Problem!?My Profile

    • Hey ARB,

      Very interesting comment!! That’s the ultimate challenge isn’t it? Do we believe that realty income’s dividend is so safe that we can completely disregard our position’s balance and not mind as it goes lower and lower? And have we given ourselves enough flexibility to ride out what could be an incredibly long slog of low total returns?
      I’ve shared my thoughts on what to do in some of the comments above, but I completely agree that O is a very hard one to part with. Cheers!
      Passive Income Dude recently posted…Recent Sell: American Electric Power (AEP)My Profile

      • As someone who measures portfolio success by dividend income rather than final balance, I’m less concerned about the ups and downs of the stock price than most (assuming that the company’s fundamentals stay sound). I also don’t trust my own ability to properly “time” a sell based on overvaluation. O is higher than it’s ever been; if I sell and the stock price never comes back down, that’s the loss of an income stream as there won’t be a price that provides a good reentry point down the line.

        ARB–Angry Retail Banker
        ARB recently posted…The Bank Isn’t Out To Get You PersonallyMy Profile

        • ARB – great thoughts and I’m curious to hear your followup on one quick question – why would you not consider selling or trimming O to replace it with a higher yielding, comparable (safe, etc) position? This would increase your dividend income, which is the focus of your portfolio. When you say dividend income, I’m assuming you mean ‘portfolio yield’? Thanks and great discussion! 🙂
          Passive Income Dude recently posted…Recent Sell: American Electric Power (AEP)My Profile

          • I wouldn’t expressly be against it. I just prefer to keep my trades at a minimum, all things else the same. Commission fees build up, and I hate to get rid of shares of a company that’s had a great history and a bright future. I try not to sell unless I feel that there is something wrong with the business. Less mistakes that way, generally speaking.

            ARB–Angry Retail Banker
            ARB recently posted…Follow Up On My Previous Article: The Guy Came Back!My Profile

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