Higher VIX just made Realty Income’s 6% dividend better (2024)

Patient investors look forsafer stockswhen the VIX begins to pop to protect their portfolio or expose themselves to high-quality assets atpotential discounts.Realty Income NYSE: Ocould be one of those picks this cycle as a part of areal estate stockplay.

A new cycle is about to start, this time sponsored by potentialinterest rate cutscoming from the Federal Reserve (the Fed), and money will likely shift into those sectors that have underperformed in the past year due to higher interest rates.

Realty Income could provide you withsafetyand a decentupside potential.

All the mechanics at play

Over the past 12 months, there has been a widening price-action gap between theVanguard Real Estate ETF NYSEARCA: VNQand the broader S&P 500.

Getting left behind by as much as 28.2% creates the potential for the sector to nowcatch upto the rest of the market in the new cycle.

According to theFedWatchtool at theCME Group NASDAQ: CME, traders are pricing in that the Fed cuts will likely land in the economy by June or May of this year.

You can learn more in real time by following what investors like Warren Buffett have been interested in buying lately. It is no surprise that the Oracle of Omaha has been buying up stock inD.R. Horton Inc. NYSE: DHIandPulteGroup Inc. NYSE: PHMin the past quarters, expecting aconstruction boom.

You can read all about the reasons behind Buffett finding value inconstruction stocksif you're looking for safety andvalue.

When and if the Fed cuts interest rates, real estate is one of the sectors that typically tend tooutperformthe rest of the market, a trend you can see happening during 2020-2021, where Realty Income stock outperformed the S&P 500 by as much as 10%.

What’s the expectation?

Suppose you look at the recent past to understand the future. In that case, dissecting the recent rise inSimon Property Group NYSE: SPGstock can be theperfect example. Because interest rates would decline, markets became more understanding of companies that carried more debt on their balance sheet.

Debt makes up roughly 87% of Simon’sbalance sheet. Understanding that not only real estate but also theretail consumerwould benefit from the FED shift, marketsbid upthe price of the stock from roughly $100 a share up to $150, a 50% bump in just one quarter.

More than that, thedividend yieldpaid by Simon stock was nearly 7% back before the rally, making it a significantly attractive proposition during a time when the U.S. ten-year bond yields stood around 5%.

So, how does this set up the party for Realty Income stock? This company carries significantly less debt, at around 39.7% of itsbalance sheet, which means that markets could startrewardingcompanies that carry a lot less debt on them until rate cuts are more of a certain event.

A 6%dividend yieldmakes the stock a muchbetter propositionthan today’s ten-year bond yields, which only pay around 4.3%. If history repeats itself here, that superior yield alongside thebetter-manageddebt could make Realty a prime suspect for investment dollars to find a new home.

You can check this thesis on how analysts currently feel about the two stocks. Assuming that the company had its run already, Simon analysts placed aprice targetof $137.80 a share, which shows a downside of 8.1% from today’s prices.

In contrast, Realty Income has earned its analyst love by commanding aprice targetof $61.50 a share, which directly implies the stockneeds to rallyby as much as 17.5% to meet that valuation.

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