This morning I added a small position in Realty Income (O). I couldn't really find a reason why but the shares took a huge hit on the open despite the overall market being relatively flat to slightly positive. The shares actually shed over 3% very early so I took the opportunity to start a position. I've been wanting to get a bit of real estate exposure and since I won't be making an investments into rental property anytime soon I figured a stable equity REIT is just as good.
I picked up 24 shares for $42.11 each which after commission cost a total of $1,018.59. This gives a per share cost basis of $42.44. Based on the current annual dividend of $2.18 this gives a YOC of 5.14%. These shares will provide $52.32 in annual dividends before future increases or reinvestment. One of the best things about Realty Income is that they are a monthly dividend payer. This is great because it allows for quicker compounding due to more compounding periods should you choose to reinvest the dividends. Management at Realty Income is very shareholder oriented and if you check out their website or annual reports they are very proud of that fact.
I've been targeting a 5% starting yield for Realty Income since in the total return should approximate starting yield + dividend growth. Assuming 3.5% annualized dividend growth this would be a 5.14% + 3.5% = 8.64% annualized return. I'm fine with this since the starting yield is higher and there's always the potential for higher dividend growth. Per David Fish's CCC list, Realty Income is a dividend contender with 19 consecutive years of paying higher dividends. I much prefer equity REITs since you're essentially becoming a partner in a real estate investment group that owns the underlying properties and leases them out. Realty Income has rent increases built into their leases which should allow for at least inflation pacing dividend growth.
At the end of May I sold a put option on Realty Income at a $45 strike level. If this put option is executed I'll be forced to buy 100 shares of Realty Income for $45 each, which after accounting for the premium I received will give a cost basis of $42.27 or pretty much right around where this purchase was made. I wanted at least a 5% yield on my position in O and this purchase is working out nicely to keep that level. I went ahead and made this purchase because O could increase back above $45 between now and expiration and I wanted to make sure I at least got a piece of this company after the big drop over the last month.
My 12 month forward dividends are now at $3,053.34 which is 87.24% of the way towards my goal of $3,500 by the end of 2013.
I've updated my FI Portfolio to reflect this addition.