Realty Income: This Dividend Stock Is a Strong Inflation Hedge

Key Points

• Realty Income stock might be one of the best picks for investors today, especially as its high dividend is set to beat any potential inflation.
• Wall Street analysts see a double-digit upside ahead in this REIT, and institutional buyers also like it.
• Bearish short sellers recently ditched their positions, knowing that the risk of a new rally is too high.

Investors are still digesting what the financial markets might do now that the United States presidential election results are out. Despite the many directions they can take with their capital today, there is one main theme that both bulls and bears will have to face in the coming months and quarters.

That theme is inflation resurgences. While the Federal Reserve (the Fed) has done a good job at taming them, assets like the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT and the SPDR Gold Shares NYSEARCA: GLD have behaved as if inflation is all but gone for the economy. As the broader market moves are typically right, especially the ones that send a bigger message, investors need to focus on inflation hedges more than anything else today.

This is why shares of Realty Income Co. NYSE: O can be useful. The real estate sector fundamentally does well through inflation due to its ability to raise rental rates to keep up with the currency's depreciating buying power. This real estate investment trust (REIT) is set up at a low enough price today to offer shareholders an inflation-beating dividend.

Inflation Protection and Long-Term Wealth Builder in One Stock

There is one unique feature about Realty income stock’s dividend, but before investors get to that bonus, here’s how much they can expect to receive. Now that the stock has traded down to 88% of its 52-week high, the price is relatively low enough to make its $3.16 per share payout as attractive as it’ll be this cycle.

Translated into an annualized yield basis, investors can now expect to make a 5.5% yield on their invested capital, which is not only above inflation but also above the 4.5% ten-year bond yields priced today as the bond market dives ahead of these economic expectations.

Now for the best part: While most dividend stocks affect their payouts quarterly, Realty Income is one of the few in the market that distributes its dividends monthly. This allows for two benefits for those savvy enough to buy this stock. First, it provides greater liquidity to diversify capital into other attractive investments, which never hurts.

Second, investors can simply take this monthly dividend and reinvest it back into Realty Income stock, accelerating their pace of ownership, which in turn provides them with a more significant monthly dividend as well. When playing this trend out over 12 months, investors can see just how much better their money will be treated in a stock like this.

Then, there’s the protection side of the equation. Real estate stocks aren’t known to be volatile. For Realty Income stock specifically, investors can expect a low beta and low correlation to the broader S&P 500. This way, whatever happens to the economy, Realty Income stock will likely protect investor capital.

Realty Income Stock: A Real Estate Wall Street Favorite

Despite underperforming some of the market's hotter sectors over the past 12 months, Wall Street analysts still see a path for Realty Income stock to deliver a double-digit rally in the coming months.

Particularly those at the UBS Group, who have recently reiterated their Buy rating for the company, this time boosting their price targets to a high of $72 from their previous $70 target. Realty Income would have to rally by as much as 23% from where it trades today to prove these new views right.

Combining the compound effect from the stock's high dividend with the double-digit upside potential from analysts, investors can see a clear path to beating any potential inflation and any market volatility caused by it.

But that's not all; even. Even the bears don't have enough conviction to stick with their short positions in Realty Income stock. Over the past month, short interest in the company has plummeted by as much as 15.4%, showing signs of bearish capitulation.

Institutional buyers came in to replace the bears that left the stock, as investors can see the 391.6% boost in ownership from KBC Group. After this allocation, the group now holds up to $39.6 million worth of Realty Income stock today, another sign of bullishness helping the stock close the gap between today's price and analyst targets.

One last bull gauge can be taken from the way markets value Realty Income stock today. By trading at a price-to-earnings (P/E) ratio of 54.3x today, Realty Income stock calls for a premium of up to 54% compared to the REIT industry's average valuation of only 35.2x.

Stocks that command a justifiable premium against peers typically outperform, and investors now know this premium is justified for Realty Income stock.