The Stock Market Is Historically Pricey: Here's 1 Reason Realty Income Is Still a No-Brainer Buy

Key Points

• The S&P 500 currently trades well above its historical average.

• Realty Income is cheap, even among other REITs.

• It sells at a low valuation despite a long track record of delivering strong total operational returns.

• 10 stocks we like better than Realty Income ›

The S&P 500 currently trades at nearly 23 times forward earnings. That is a historically high level, as the market has traded at an average of around 15 times forward earnings over the past couple of decades.

While the market is currently pricey, that's not the case with Realty Income (NYSE: O). The real estate investment trust (REIT) trades at a much lower level compared to the market and its peer group. That makes it a no-brainer buy in today's market.

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A dirt cheap REIT

Realty Income currently expects to generate between $4.24 and $4.28 per share of adjusted funds from operations (FFO) this year. With its share price currently around $60, the REIT trades at about 14 times its forward earnings. That's well below the S&P 500's valuation and that of other REITs in that broad market index, which currently trade at about 18 times forward earnings on average.

That low valuation is why Realty Income currently offers such a high dividend yield. At nearly 5.5% it's well above the S&P 500 (1.2%) and REIT sector average of around 4%.

Realty Income trades at a lower valuation compared to its peer group, despite delivering peer-leading total operational returns (dividend yield plus FFO growth rate) over the past several years. For example, it has delivered a 9.7% average annual total operational return over the past five years, well above the 7.7% average of other REITs in the S&P 500.

The company remains in a strong position to continue producing above-average returns. It has one of the best balance sheets in the sector, giving it ample financial capacity to continue expanding its portfolio. That should enable Realty Income to continue increasing its high-yielding dividend. The REIT has currently raised its payment for 112 straight quarters.

Realty Income's low valuation, especially for such a high-quality company, makes it a no-brainer buy in the currently richly valued investment environment.

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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.