Realty Income (O), again

Re-scoring everything we own

A lower price does not automatically make a stock a better buy. We have said that twice now, once when we bought more Lowe's and once when we chose not to buy more Nike. The test is whether the lower price actually moves one of the five boxes. So we re-scored all fifteen holdings on this afternoon's prices, with current payout ratios, against each stock's own five-year median yield.

Scores that went up because the price crossed a line:

• T. Rowe Price, 92 to 96. At $103.74 the yield is 5.0%, now 17% above its own five-year median, so the Undervalued box moved from 16 to 20. Highest clean score in the portfolio apart from Bank OZK.
• Realty Income, 84 to 92. At $54.60 the yield is 5.96%, 19% above its five-year median of about 5.0%. In June it was only 4% above, so the Undervalued box was a 12. Today it is a 20.
• NextEra, 88 to 92 (yield crossed 3%) and PepsiCo, 88 to 92 (payout improved to 74% as earnings recovered).

Scores that went down: Medtronic to 80, because it is up 16% since June and its yield has fallen back to its median. Tractor Supply to 80, because its payout crossed 50%. Zoetis to 84, up 8% in a week.

Unchanged at the top: Bank OZK 100, Comcast, Lowe's, and PPG at 92. Nike still 84.

The 100 we did not buy

One holding came back with a perfect score, and we want to explain why that did not settle it.

McCormick's headline payout ratio dropped from 65% to 35% since August, which would make its Safe box a 20 and its total a 100. But that happened because McCormick booked a large one-time gain that nearly doubled its trailing earnings. Its forward price-to-earnings ratio is 14.5 against a trailing 8.1, which is the market saying the same thing. On normal earnings the payout is about 61%, the Safe box is a 12, and the honest score is 92.

We score every stock on the same mechanical, headline earnings number so that nobody can accuse us of picking the flattering version. We have been bitten by that in the other direction, when one-time charges made PepsiCo and Medtronic look worse than they were. Today it cut the other way, and consistency means we say so rather than take the 100.

Why Realty Income and not T. Rowe Price

T. Rowe Price scored 96. Realty Income scored 92. We bought Realty Income, and that was a judgment call, so here it is in the open.

Our published rules rank stocks by score. They do not say anything about sector balance, and we are not going to pretend they do. Here is the judgment: financials already had two names at 12% of the portfolio, and a third buy would have pushed it to 17%. Real estate had one name at 5%, our second-smallest sector. Realty Income pays monthly, so the dividends start compounding within days. And at 5.96% it carries the highest yield of any candidate, which means this $100 adds more income than any single week in our history.

That is the discretion, disclosed. If you would have bought T. Rowe Price on the higher score, that is the rules-only answer and it is a perfectly good one.

The five boxes on today's buy

• Pays: 55 years of dividends, 670-plus consecutive monthly payments, never cut. 20/20
• Raises: 31 straight years of increases. 20/20
• Safe: 73% of adjusted funds from operations, the REIT measure of cash earnings. Management guided 2026 AFFO to $4.44 to $4.45 per share in August against a $3.25 dividend. (For REITs the usual earnings-per-share payout is meaningless because of depreciation; we explained that in week three.) 12/20
• Undervalued: yield 19% above its own five-year median. 20/20
• Yield that matters: 5.96%. 20/20

Total: 92, Exceptional.

What the research says

We read Morningstar's September report before buying. It rates Realty Income five stars with a fair value of $74, so we paid about 74 cents on the dollar. It also gives the company its lowest uncertainty rating, its highest grade for capital allocation, and notes that Fitch upgraded the credit rating to A in August. Occupancy is 98.6%.

The bears' case is also in that report, and we agree with most of it. Realty Income has no moat: its buildings are generic single-tenant boxes that anyone with $5 million can build. Its leases carry rent increases of only about 1% a year, so almost all of its growth has to come from buying more property, and rising interest rates squeeze the profit on each purchase. About half its tenants are below investment grade. And the dividend grew only about 1.25% over the past year.

In other words, this is a slow-growth income machine, priced as if something were wrong with it, when the only thing that changed is interest rates. That was our thesis in week three at $62. It is a better thesis at $54.60.

The honest part

We are buying a second time at a loss on the first. Our June shares are down about 12.5%. Averaging down only makes sense when the business has not changed, and here it has not: same occupancy, same payout, same monthly dividend, higher credit rating.

Realty Income is now about 11% of the portfolio, a top-three position alongside Lowe's and NextEra. Three holdings now sit near 11% each. We would rather own more of what is cheapest than spread money evenly for the sake of it, but that is three concentrated bets, and we will keep saying so.

Growth is the weak spot. A 6% yield growing at 1 to 3% a year will not bend the income curve the way a 3% yield growing at 8% will. We stored a 3% growth rate for the projection, unchanged from June. A portfolio needs both kinds of holdings, and this one tilts toward income today.

The numbers on this week's buy

• Invested: $100.00, all fresh deposit. No dividends landed this week, but Realty Income pays Thursday on our new, larger share count and Medtronic pays Friday.
• Bought: 1.8316 shares at $54.60, bringing our Realty Income position to 3.4332 shares
• New annual dividend income added: about $5.96 per year, the largest single-week addition in eighteen weeks
• The portfolio after 18 weeks: $1,800.00 contributed, $8.33 reinvested, worth about $1,711.36, throwing off about $65.46 a year, roughly $5.45 a month
• Fifteen holdings across ten sectors. No new names. Technology is still the one we don't own.

The portfolio is worth about 5.4% less than we have put in, better than the 7.4% deficit we reported last week as prices recovered across the board. The income line went from $59.51 to $65.46 a year this week, a 10% jump from one $100 buy, which is what a 6% yield does.

The running totals are on the portfolio page, and the slider lets you drag through time to watch the income grow.

That's week eighteen. Fifteen stocks re-scored, one judgment call explained, and the monthly dividend just got bigger. See you next Monday for pick number nineteen.

This is not financial advice. We're individual investors sharing our own approach and the reasoning behind our own real decisions, not licensed advisors. We own, or are buying, the stocks we write about in this series. Do your own research and consider speaking with a financial professional before investing. Dividend figures, yields, share counts, and prices are accurate to the best of our knowledge as of the publish date and will change over time.