Buy the Dip on This Stock for Its Monthly Dividend and 5.4% Yield

Realty Income (NYSE: O) has slipped over the past few months from nearly $70 per share to around $60. Almost nobody enjoys watching stock prices fall, but for dividend-focused investors, a dip can be a blessing in disguise. Lower share prices mean higher dividend yields and more bang for your buck when it comes to dividend income. At this wrirting, the stock's dividend yield is 5.4%.

Of course, stocks can sometimes drop because of major problems with the underlying companies. Fortunately, that doesn't seem to be the case with Realty Income. The company generates strong cash profits to support its monthly dividend, and the stock's decline strengthens the case for buying shares today.

Here's a closer look.

Image source: The Motley Fool.

Dependable dividends at a very fair price

Realty Income is one of the world's most prominent real estate investment trusts (REITs). As a net lease REIT, Realty Income acquires properties and leases them to tenants, who are responsible for expenses such as maintenance, taxes, and insurance.

REITs report their profits as funds from operations, a non-GAAP (adjusted) metric that represents the company's distributable profits -- money it can pay to shareholders as dividends. The fact that Realty Income pays a monthly dividend and has raised it for more than 31 consecutive years speaks to the resilience of its business through COVID-19, recessions, and other challenges.

Realty Income currently expects adjusted FFO per share of $4.41 to $4.44 this year, up from $4.28 last year and $4.19 in 2024. At roughly $60 per share, Realty Income trades at just over 14 times its guided 2026 FFO. If you think of that like a price-to-earnings ratio, it's a very attractive valuation for a dependable business with 4% to 5% annualized dividend growth.

Why Realty Income is a sneaky good total returns stock

If you buy Realty Income, enjoy the dividends! But if you want to get the most out of the stock, you'll want to hold it for a long time and reinvest all dividends. When you reinvest a growing dividend, it adds another compounding effect that can become quite effective over a decade or two.

Realty Income has grown its business, measured as long-term dividend growth, by 4.2% annually over its long history. Yet, you can see that the stock has thrashed the S&P 500 index, which historically generates approximately 9% to 10% annualized total returns.

O Total Return Price data by YCharts

Investors who skip over Realty Income because they assume that a steady dividend stock can't generate strong total returns have been missing out. The stock's recent dip is a fantastic opportunity to hop aboard this monthly dividend train.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.