Volatility returned to the stock market this year. The S&P 500 briefly entered correction territory, tumbling 10% from its most recent high. Meanwhile, the Nasdaq Composite plunged into a bear market — dropping 20% from its peak. While they’ve recovered some of their losses — the S&P 500 and Nasdaq are now down 8% and 15%, respectively — this volatility has unnerved investors.
While investors can’t completely eradicate volatility from their portfolio, they can take steps to blunt its impact by owning stocks that have historically been less volatile than the market. One stock traditionally less volatile than the S&P 500 is Realty Income (O). Here’s what makes this real estate investment trust (REIT) a great way to take some of the market’s volatility out of your portfolio.
One of the least volatile stocks around
Realty Income has some of the lowest share-price volatility of stocks in the S&P 500. One key volatility metric is beta. It measures a stock’s volatility compared to the market, which has a beta of one. Stocks with a beta greater than 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 Realty Income is much less volatile than the S&P 500. As such, we can expect that it won’t decline as much as the broader market during a sell-off. Historically, the company’s total shareholder return downside volatility is a mere 3.8%, the sixth-lowest of companies listed in the S&P 500.
However, less volatility isn’t the only thing Realty Income brings to an investor’s portfolio. The REIT also has a long history of producing strong total returns. It has delivered a compound average annual total shareholder return 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 companies in the S&P 500. In other words, the company has produced higher returns with less volatility than most stocks in the market over the years.
Realty Income’s secret sauce
The factor driving 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 owns a vast and diversified portfolio of commercial real estate. It focuses on owning single-tenant net lease real estate. That lease structure makes the tenant responsible for maintenance, building insurance, and real estate taxes, enabling Realty Income to generate stable rental income.
Further, the REIT concentrates on owning operationally critical properties leased to high-quality tenants in industries resilient to economic downturns and isolated from the pressures of e-commerce. These factors add to the durability of the REIT’s rental income.
Realty Income complements its high-quality real estate portfolio with a top-tier financial profile. The company has one of the highest credit ratings in the REIT sector. In addition, it has a relatively conservative dividend payout ratio for a REIT. That gives it plenty of cushion to weather tough times and the financial flexibility to steadily expand its portfolio by acquiring more high-quality real estate.
Because of that, the REIT has steadily grown its earnings per share, allowing it to consistently increase its dividend. Realty Income recently announced its 115th dividend increase since its IPO. It has now raised its payout in each of the last 98 consecutive quarters. Overall, the REIT has grown its monthly dividend at a 4.4% annual rate. That steady, rising income stream has also played a considerable role in tamping down the stock’s volatility. When shares fall, it makes Realty Income more attractive to income-seeking investors who swoop in and buy shares at a higher 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 steadily grow its earnings and dividend over the years. As a result, it has produced strong returns with less volatility than most other stocks. Because of that, it’s an ideal addition to a portfolio filled with higher-volatility stocks. It can help blunt volatility’s impact without reducing overall returns.
Originally published on Fool.com
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Matthew DiLallo owns Realty Income. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.