Shares of Realty Income (NYSE: O) were heading lower Wednesday in response to rising Treasury yields, which signaled that investors think that interest rates could go up in the Trump administration, or at least remain elevated. That condition would present two challenges for the real estate investment trust (REIT).
As of 1:43 p.m. ET, the stock was down by 3.8%, in line with a broader decline in real estate stocks. The Real Estate Select Sector SPDR Fund (NYSEMKT: XLRE) was down by 3.4% at the same time, while the S&P 500 was up by more than 2%.
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REITs like Realty Income generally struggled Wednesday due to higher Treasury yields, which portend higher interest rates. Bonds compete with REIT stocks like Realty Income, which pay out more than 90% of their profits as dividends, and higher bond yields could attract dividend investors back to bonds. Realty Income has long been a popular dividend stock as it pays dividends monthly and currently offers a yield of 5.4%.
Additionally, Realty Income has a resilient business model since it uses triple-net leases and generally leases its thousands of stand-alone retail properties to recession-resistant chains like convenience stores and drugstores.
The other reason rising yields are a challenge for Realty Income is that the company borrows money to buy new properties, so higher interest rates will raise its interest expenses.
The good news for shareholders is that Realty Income should be insulated from any major changes during the Trump administration. Aside from interest rates, the business is relatively well-protected from shifts in the macro-level economy.
Considering that, investors could take the opportunity to scoop up the stock at a discount as its 5.4% dividend yield looks attractive, given its track record.
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