O Stock Vs VNQ: Which Is Best?

Realty Income Corp (NYSE:O) and Vanguard Real Estate Index Fund ETF (NYSEARCA:VNQ) are two popular real estate investment trusts (REIT). Each took a nosedive during the coronavirus crash and is still trading lower than it did at this point in 2019.

The declining share prices originated from consumers and businesses struggling to keep up with rent and mortgage payments in the aftermath of the initial shutdown. However, government stimulus programs helped them stave off losses and get back on the right track. Now investors wonder which is best – O stock vs VNQ?

Both have high liquidity and generate steady income, even if their value doesn’t always appreciate. Although both are REITs, they have much different strategies that will create different outcomes for shareholders.

It’s important to understand what exactly they’re investing in and how they’ll implement their strategies. 

Is O Stock A Buy?

O is trading in the $50-$60 range in the aftermath of the coronavirus pandemic. This gives it a market cap revolving around $20 billion.

Realty Income specializes in single-tenant retail properties, and its tenants are mostly recession resistant, including dollar stores, c-stores, drugstores, and warehouse clubs.

The company paid monthly dividends for 602 straight months and increased its payout for 82 consecutive quarters. It provided 15.3 percent annualized returns since it got listed in 1994.

The company’s model is considered a safe bet by most analysts because of its long-term net leases, which are all-inclusive deals that put the tenant in charge of taxes, insurance, and property maintenance.

On top of this, the tenants represented in its model have largely resisted being destroyed by ecommerce and remained open throughout the pandemic.

This gives investors a positive outlook on the long-term sustainability of its business model. Rent payments also started normalizing for many of its tenants by the end of the summer, as cities slowly reopened across the country.

It increased its dividend 107 times so far, and its liquidity should have no issues weathering any storms caused by the coronavirus.

However, is it a better investment than VNQ?

Should You Invest in VNQ?

The Vanguard Group had over $6.2 trillion in assets under management for 30 million investors at the start of 2020, and VNQ is its REIT ETF. Its expense ratio of 0.12 percent means that investors maximize returns on its 4.1 percent annual dividend yield.

Unlike O, VNQ is not hyper-focused on one property type, instead diversifying across a mix of properties weighted across its portfolio. This means it has exposure in office buildings, hotels, and other properties the coronavirus heavily hit.

While this REIT hasn’t worked this hard since the Great Recession, which was directly tied to the real estate industry.

It recovered from the coronavirus crash, but not to the level it traded at the start of the year. It entered the 2020 holiday season about halfway between its 52-week low of $55.58 and 52-week high of $99.72, meaning there’s plenty of room for growth. But the hanging question is what will happen to the real estate sector in 2021.

Here’s what to expect for these REITs.

Risks Of Buying O Stock

Not everything is rosy with Realty Income. Some of its tenants, like movie theaters and fitness centers, took major hits during the pandemic. The business disruptions these businesses experienced will impact the trust fund well into 2021, and government foreclosure and eviction moratoriums remain in effect through year end.

In 2021, we will see rocky waters in this sector, especially in Regal Cinemas, AMC Theaters, and Lifetime Fitness, all of which were forced to shut down and collectively represent 90 leases, or 8 percent of the REIT’s profits.

Dollar General and Dollar Tree/Family Dollar also have a large presence in the fund. The coronavirus crash hit O much harder than the foreclosure crisis, showing that it’s not necessarily recession-proof.

It does still have leases with companies like 7-Eleven, Walgreens (WBA), and Walmart (WMT) that will likely keep it from going to zero anytime in your lifetime. If you’re looking for a more diverse approach, VNQ may be better.

Dangers of Investing in VNQ

This market-cap weighted real estate index follows the conventional wisdom of not keeping all your eggs in one basket. However, this diversified approach affected VNQ more than O, as it has exposure in a lot of hard-hit industries.

The hospitality industry alone was still facing 50 percent occupancy drops year-over-year. Small businesses shutting down sent ripples through this portfolio, but that’s only one piece of the puzzle – it also has 13.51 percent invested in residential REITs.

Although the CARES Act expired in the summer, consumer foreclosure/eviction protections and Pandemic Unemployment Assistance last until the end of the year.

Once these protections expire, it’s unclear just how many people may be behind on payments. Because VNQ as an REIT is also investing in multiple REITs, it mirrors the mortgage-backed securities scandal that led to the subprime mortgage crisis.

VNQ Vs O Stock: The Bottom Line

Real estate is one of the most secure investments you can find. However, not everyone has the budget to buy multiple properties. This is why REITs are often an excellent choice to diversify your investment.

There are two ways to go about it – O focuses on recession-resistant industries like pharmacies, c-stores, and warehouses, while VNQ spreads across commercial and residential real estate investments and REITs. The coronavirus affected both, but they’ve paid steady dividends through the crisis.

If you’re seeking a cheap investment, either of these indices will do. However, there’s a good chance it’ll go down in 2021 before it goes back up. Be sure to perform your due diligence before investing and prepare for the worst.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.