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The Snowball That Grows Even When It's Melting!
Published 20 days ago • 4 min read
This Valentine's Day was a very special one!
My wife, Jena, and I don't exchange gifts for Hallmark holidays because we'd rather spend money on random nights out together.
But this year, I bought something special: more passive income!
On Valentine's Day, we received a $56.76 dividend check from Realty Income (O), "The Monthly Dividend Company" and in a historic first, with that dividend check, we bought a full share of Realty Income for $55.19.
As of this writing that's $3.17 of additional passive income generated solely from passive income.
SimplySafeDividends.com
SimpleSafeDividends.com
Passive income creates more passive income, which generates even more passive income. They call this the dividend snowball, even if it's melting.
We hold Realty Income in a Self-Directed IRA (SDIRA) because REITs are pass-through entities legally required to distribute at least 90% of their taxable income to shareholders.
From Investopedia: This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates.
But it hasn't been all roses. Following the actual path of a rolling and growing snowball, the share price has sloped downward, and we're currently -7.9%, not including dividends received.
SimplySafeDividends.com
We hold Realty Income because it offers stable and growing dividend income as a commercial real estate landlord.
Most of its rent comes from well-known retail tenants, but the top two—Dollar General (DG) and Walgreens Boots Alliance (WBA)—are uncertain. Together, they account for 6.6% of the total annual rent.
Realty Income Investor Presentation
REITs in general have struggled because interest is their lifeblood, so higher interest rates translate into lower future returns.
"Risk-free" fixed income from bonds also becomes more attractive and sucks money out of the world of REITs, creating lower share prices, which push the dividend yields up until the risk of owning REITs is attractive and buyers stabilize the falling share prices.
While bonds may be more attractive right now, their passive income doesn't grow and keep up with inflation, which proves that every investment has risks. Bonds suffer from "Inflation Risk" because an increase in inflation reduces their purchasing power.
REITs like Realty Income have rent escalators built into their tenant contracts to help rental income keep pace with inflation.
SimplySafeDividends.com
Realty Income is one of the largest REITs, with a market cap of almost $48 billion. This makes growing more challenging because of the "law of large numbers."
We've seen them start to explore new growth through international real estate, data centers, and an institutional private capital fund, which some YouTuber made an AWESOME VIDEO about!
Many people look at investments like Realty Income and say "It's not beating the market." Indeed it hasn't lately, but if you're in wealth preservation mode or want stable passive income that keeps pace with inflation, then "beating the market" isn't your reason for owning it.
If you had bought a share of Realty Income exactly twenty years ago for $24.24, you would have received a total return of 529% and $43.84 in dividend income—almost double your initial investment!
DividendChannel.com
If you had bought the S&P500, you'd have had an almost 100% greater total return, but according to the chart, Realty Income was the better-performing asset until the tech boom and the end of zero interest rates.
Peter Lynch's quote: "Know what you own and know why you own it" comes to mind.
Peter Lynch quote
We own Realty Income (O) for its stable and growing passive income. We intend to hold "forever" and also own the entire US stock market haystack through the Vanguard Total Stock Market ETF (VTI).
Someday interest rates will drop, REITs will become more attractive than bonds, and Realty Income's share price will recover.
But we don't know when that will be, and I'm content being paid to wait because I'm not buying Realty Income to trade but to generate slowly growing passive income.
Long-term investing isn't about "beating the market" but meeting your unique financial goals while sleeping well at night.
I'd love for you to reply and share your thoughts about REITs and Realty Income. I'll respond to every response!
😁THANK YOU to all who responded to the last newsletter!!
Tracy Ryniec gives her thoughts on 3 Lesson's From Buffett's Apple Stock Sales. This was a fun listen and goes to show that nothing is absolute, no matter who is saying it!
🎦If you missed it, sharing 5 (but really four) quality dividend growth stocks for beginners!
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Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
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