Realty Income, symbol O, has been in our portfolio since we were alerted to it by Morningstar research maybe a decade ago. We like it for many reasons, most of all the monthly dividend that the company increases on a regular schedule. We like due to the very transparent investor friendly info the company places on it's website. We really like it for what we believe is superior management and the willingness to make changes when the economy moves against them. Just a great company with a good dividend. Realty Income is a good buy at $35 in our opinion which puts the payout right at 5%. Good for a solid blue chip type company even with the non tax favored real estate trust dividend. However the stock has moved nicely above $40 now and the yield is now just above 4%. Our preference is 5% and above and as we have noted in a recent posting our universe of stocks have dwindled due to the move up in stock prices for good yielding stocks.
Maybe we need to adjust our thinking to the new normal, or more simply accept the new era of what looks like cheap money for a longer period of time. Many of us who lived through the late 1970's know that inflation can rear it's ugly head and wipe out your savings and make buying houses and such so expensive no one can afford them. We remember buying a municipal bond at above 15% and a CD in double digits yield as well. At the time we figured a few more of those and we could retire at no later than 40 years old. Did not happen of course. Truth was that era of high priced money was abnormal and was engineered by Fed Chair PaulVolcker and President Ronald Reagan to snuff out runaway inflation. It worked and rates have been basically on a down trend since then. Before the late 1970's normal lending rates were 4% or so and CD's and saving accounts paid less than 3% with what most people do not remember was a law that would not let banks pay more than about 3%.
Rates today for 30 year home loans are at 3.875% for good credit, rates for CD's are around 1%, US Treasuries are around 1.5% for 10 year bonds, AA muni bonds are trading at around 4%, all of which point to rates that are significantly lower than just a few years ago. Therefore blue chip stock dividends in the 3% to 4% area is about right for long term investing. The dividend plus expected capital gains should earn investors around 7% and that is also about right for long term investing for investments with risk profiles of blue chip stocks.
The point here is that these low long term rates could be with us for more than just a few months or few years. They could be standard fare for a couple of decades or more because we have gone from an economy with 3% plus growth to one with less than 1% long term growth. For those of us who have lived with higher rates this is going to be hard to accept and hard to change our perspective, but if we are to trade and invest in this new economic environment this is likely the future in the US for our lifetime.
Some of this cheap money can be laid at the feet of the US Federal Reserve which has been printing money like mad to compensate for huge US Government budget deficits. Expected inflation can only happen when economic growth is above 4% where too much money begins chasing too few goods and that does not look like it will happen for the foreseeable future. There is the simple fact that US citizens are tapped out consumer wise due to lots of debt and lack of employment. Feeling poorer and being poorer they have cut back. With the Federal Reserve saying that interest rates are staying put through late 2014 there is no expectation of economic growth on the horizon.
So it is time to accept valuations where dividends are closer to 4% average as a trader and investor and adjust accordingly.
We have dropped O from our portfolio currently and added PM on a temporary basis to occupy that capital space.
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