Where Will Realty Income Stock Be in 3 Years?

Realty Income (O 0.62%), one of the world's largest real estate investment trusts (REITs), is often considered a dependable dividend stock for conservative investors. But over the past three years, its stock declined about 23% as interest rates rose. Even with reinvested dividends, it delivered a dismal negative total return of 10%.

Realty Income lost its luster for a few simple reasons. Rising rates made it more expensive to purchase new properties, and they made its dividends less attractive by driving up the yields of safer CDs, Treasury bills, and other fixed-income investments. Inflation and other macroheadwinds also throttled the growth of some of its top tenants.

Image source: Getty Images.

But as interest rates decline, will Realty Income's stock bounce back over the next three years? Let's review its near-term challenges and long-term catalysts to decide.

What happened to Realty Income over the past few years?

As a retail REIT, Realty Income purchases a lot of properties, rents them out to businesses, and splits the rental income with its investors. It also needs to distribute at least 90% of its pre-tax income as dividends to maintain a favorable tax rate.

Realty Income owns 15,457 properties across the U.S., U.K, and Europe. It mainly leases its properties to recession-resistant retailers, and its top tenants include Dollar General (DG 1.03%) (3.3% of its annualized contracted rent in its latest quarter), Walgreens (WBA -0.64%) (3.3%), Dollar Tree (DLTR -0.12%) (3.1%), and 7-Eleven (SVNDY 0.61%) (2.5%). Some of those tenants -- including Walgreens and Dollar Tree -- have been struggling with store closures over the past few years.

Yet Realty's occupancy rate has never dipped below 96% since its initial public offering (IPO) in 1994. That metric also stayed above 98% over the past four years as the growth of its stronger tenants (like Dollar General) offset the issues at its weaker tenants. It also continued to grow its adjusted funds from operations (AFFO) even after it acquired its smaller rival Spirit Realty and bought more properties.

Data source: Realty Income.

For the full year, Realty Income expects its occupancy rate to remain above 98% and for its AFFO per share to grow 4% to 5%, or $4.16 to $4.21. At $53, Realty's stock trades at less than 13 times the midpoint of that forecast. It also pays a forward dividend yield of 6%. It pays those dividends monthly, and it's raised its payout 128 times since its IPO.

What will happen to Realty Income over the next three years?

Realty Income's low valuation, high yield, and stable growth should limit its downside potential. However, its upside potential could be limited by elevated interest rates and other macroheadwinds over the next three years.

The Fed cut interest rates three times in 2024, but it only expects two rate cuts in 2025. That cautious outlook suggests inflation hasn't been tamed yet, and President-elect Trump's plans to raise tariffs on products from China, Canada, and Mexico once he takes office could exacerbate that pressure. That's why Realty Income and many other leading REITs slumped after the presidential election in November.

Yet Realty Income's scale and diversification helped it weather plenty of economic headwinds over the past three decades. It's also been expanding beyond its core market of retail and industrial customers by gaining more data center and gaming tenants. So as long as it keeps buying new properties, maintains a high occupancy rate, and grows its AFFO per share, its stock should bounce back over the next three years.

Realty's AFFO per share grew at a compound annual growth rate (CAGR) of 5.7% from 2020 to 2023. Assuming it maintains the same valuation and grows its AFFO per share at a CAGR of 5% from 2023 to 2027, its stock price could rise 20% to $63 by the final year. It should also continue to raise its monthly dividends several times every year.

Realty Income and its peers might remain out of favor until there's more visibility into the Fed's future rate cuts and Trump's economic plans, but it's still a great stock to buy and hold for investors who need reliable dividend payments every month.