Volatility returned to the stock market this year. the S&P 500 It briefly entered correction territory, falling 10% from its most recent high. Meanwhile, the Nasdaq Composite plunged into a bear market, falling 20% from its peak. While they have recouped some of their losses (the S&P 500 and Nasdaq are now down 8% and 15%, respectively), this volatility has unnerved investors.
While investors cannot completely eradicate portfolio volatility, they can take steps to mitigate its impact by owning stocks that have historically been less volatile than the market. A stock traditionally less volatile than the S&P 500 is Real Estate Income (or 1.75% ). This is what makes this real estate investment trust (REIT) a great way to remove some of the market volatility from your portfolio.
One of the least volatile stocks out there
Realty Income has some of the lowest share price volatility of stocks in the S&P 500. A key volatility metric is beta. It measures the volatility of a stock. compared to the market, which has a beta of one. Stocks with a beta above one are more volatile than the market, while those below one are generally less volatile.
Realty Income has a beta of 0.5, the second lowest beta among REITs in the S&P 500. A low beta means that real estate income is much less volatile than the S&P 500. As such, we can expect it to not decline as much as the broader market during a sell-off. Historically, the company’s downside volatility of total shareholder return is just 3.8%, the sixth lowest of any company listed in the S&P 500.
However, less volatility is not the only thing that Realty Income brings to an investor’s portfolio. The REIT also has a long history of producing strong total returns. It has generated a compounded average annual total return to shareholders of 15.5% since its initial public offering (IPO) in 1994. That’s an elite return for a stock with such low share price volatility. Realty Income’s return per unit of market risk is in the 95th percentile of S&P 500 companies. In other words, the company has produced higher returns with less volatility than most stocks in the market over the past decade. years.
The secret sauce of Realty Income
The driving factor behind Realty Income’s ability to produce strong returns with less volatility is its ultra-low risk business model. The foundation is the REIT’s portfolio. It has a vast and diversified portfolio of commercial real estate. Focuses on owning single tenant net lease real estate. That leasing structure makes the tenant responsible for maintenance, building insurance, and property taxes, allowing Realty Income to generate stable rental income.
In addition, the REIT focuses on owning operationally critical properties leased to high-quality tenants in industries that are resilient to economic downturns and insulated from e-commerce pressures. These factors add to the durability of the REIT’s rental income.
Realty Income complements its portfolio of high-quality real estate with a first-rate financial profile. The company has one of the highest credit ratings in the REIT sector. In addition, it has a relatively conservative character. dividend payout ratio for a REIT. That gives you enough protection to weather tough times and the financial flexibility to constantly expand your portfolio by acquiring more high-quality real estate.
Because of that, the REIT has consistently increased its earnings per share, allowing it to consistently increase its dividend. Realty Income recently announced its 115th dividend increase since its initial public offering. You have now increased your payment in each of the last 98 consecutive quarters. Overall, the REIT has increased its monthly dividend at a rate of 4.4% per year. That steady and growing stream of income has also played a significant role in reducing stock volatility. When stocks fall, it makes Realty Income more attractive to investors looking for rushing income and buying stocks at a higher price. dividend yield.
A great way to reduce the sting of volatility.
Realty Income’s combination of a rock-solid portfolio and financial profile has enabled it to consistently grow its earnings and dividends over the years. As a result, it has produced strong returns with less volatility than most other stocks. Therefore, it is an ideal addition to a portfolio full of higher volatility stocks. It can help mitigate the impact of volatility without reducing overall returns.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.