The Easy Income Strategy – EIS Scores

Real Estate at Work is Easy Money

This is the second in a new series. My goal is to present arguments in favor of a simplified and uncomplicated way to have income before and in retirement that grows even if we do nothing.

The best way to help you see how easy money works is by example. Today’s example will focus on a real estate investment trust, usually abbreviated as REIT. This abbreviated form is pronounced “RATE” but some will say “RIGHT.”

In each of these educational posts I plan to discuss: 1) The nature of the investment, 2) The reason it may qualify as easy money, 3) The quality of the investment using outside resources to help gauge quality, and the 4) Factors that determine if and when I buy shares of the investment. In each case I will be talking about an investment that we own. Always bear in mind that our ownership is not a recommendation to buy the investment. Always align your investment purchases with your written investment goal, strategy, and rules for each investment you make. Suffice it to say, if we invest in something, it is certainly the result of focusing on our goal and strategy.

The Nature of O

I don’t want to buy or maintain or pay taxes on properties. I want someone to manage the property, collect the rent, pay the property taxes, and then just send me money. I want the rent to increase so that my income increases. I don’t want undesirable properties in undesirable locations. “O” is the ticker symbol for a REIT known as “Realty Income.” That is a good name for this investment.

Realty Income, The Monthly Dividend Company, is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 6,500 real estate properties owned under long-term lease agreements with our commercial clients. To date, the company has declared 608 consecutive common stock monthly dividends throughout its 52-year operating history and increased the dividend 109 times since Realty Income’s public listing in 1994 (NYSE: O). The company is a member of the S&P 500 Dividend Aristocrats index. Additional information about the company can be obtained from the corporate website at www.realtyincome.com.

Why I Think O Qualifies using EIS*

When I look at an investment, it is now like any other task that I have done a hundred times. I don’t even have to remind myself to consider the attributes I need to see before I invest. The following image summarizes most of the things I want to see in an investment. See “What is EIS” in a paragraph below.

The Quality of the Investment

There are many voices that think they have the answer to the investor’s questions. Fidelity Investments presents an “Equity Summary Score” or ESS. I have found this score to be interesting but not especially helpful when dealing with REITs.

Seeking Alpha has three helpful scores. The one that is the least helpful, in my opinion, are the Wallstreet analysts. My skepticism lies in their own desire to make money from the investing activities of others. The second one, which is a bit more helpful, is the Seeking Alpha Authors ranking. These authors are often skeptics, and I like to hear what skeptics might be saying. However, as is the case with many things in life, some authors use questionable logic in their recommendations. The third, and most helpful score, is the QUANT rating.

“Quant Ratings: An overall rating for each stock based on objective data, optimized for predictive value. Seeking Alpha’s Quant Ratings are generated by comparing over 100 metrics for each stock to other stocks and ranking the stock accordingly. Quant Ratings are displayed on symbol pages on the Seeking Alpha desktop website, and in the Ratings summary box (which also contains the average rating by Seeking Alpha authors on the stock and the average rating by Investment bank analysts).”

StockRover also presents some helpful data. The Piotroski F Score looks at a company’s financial strength. The Altman Z-Score considers the likelihood of the company going bankrupt. I am skeptical of the Altman Z-Score for REITs. However, I want to include it as another voice so that decisions are made with input from multiple sources.

Weiss Ratings used to be my favorite service. However, their scores have become less useful to me when compared to what I can get on Seeking Alpha. Some of the past contributors to the Weiss family of newsletters were less than helpful. For Realty Income, Weiss only gives a “C” rating. That is their way of saying “hold” the investment, but don’t buy at this time.

Factors I Consider Before Buying

There are three factors that are preeminent or prominent in my mind. The first is that the business must not only be sustainable, but it must also have growing revenue and earnings. Growth is a sign of a business with wise leadership and future opportunity. The second is that the board of directors sees value in sharing a good portion of the profits or the FFOs with the shareholders. This portion should grow over time. This means the dividend payout ratio or FFO payout ratio is not less than 20% for most of our EIS investments. The third is the ranking of the investment using Seeking Alpha’s QUANT score.

In the case of Realty Income, the REIT compares favorably in the sector. It is currently eight out of 179 in the real estate sector. In other words, it is in the top 5% of all other REIT investments. It is also number three out of 26 in the industry. The industry is “Retail REITs.” This puts O in the top 12% of all of the choices in the industry. The only two above O are “GTY” and “REG.” We also own shares of GTY.

What is EIS?

EIS is my abbreviation for “Easy Income Strategy.” Each value needs to be at least a “3” or I will pause and not rush to buy. If most of the values are “4” or “5”, I will either buy, or continue to hold or add more shares. Therefore, “5” is a strong reason to buy, “4” is a good reason to buy, and anything lower than a “3” is a cause for potential concern.

Conclusion

When inflation is nipping at your heels, think about how you must manage your investments. Don’t take the hard path. Consider reading the rest of the posts in this series and then set a strategy for easy money. Of course, if you have a better solution, use your solution instead.

Full Disclosure

Cindie and I own a combined total of 1,200 shares of O. Those shares are worth approximately $77,000. Therefore, O is one of our top ten investments.

The Easy Income Strategy – What is Easy Income?

We need to define “easy.” When I say easy, I don’t mean there is no work involved. Rather, the term is meant to convey simplified, unhurried, user-friendly, and uncomplicated. Therefore, it isn’t about trying to sell something, and it certainly isn’t about trading options. It also isn’t about trying to time the market with a buy low and sell high strategy. It is about a process that results in income, and the primary goal is to minimize the time spent while maximizing income that grows over time.

Easy Money is Easy

Easy money is money you can easily acquire. It is income obtained with a minimum of effort. It sounds too good to be true. In fact, most of the time when someone pitches something that is too good to be true, it isn’t true. I think there are some exceptions.