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There has been some discussion on this board, very infrequent discussion about the REIT stock O.

I would like to clear up a few things. REITs are remarkably stable by law. The REIT is a special classification allowing the company to not pay corporate income taxes as the mission of the company is to generate income for shareholders. This loophole allows the company to make profits where a taxable company could not.

However REIT regulations require the company to pay something like 95% of all income back out in a dividend to shareholders.

Realty Income stock is perhaps one of the most stable stocks in the market. The majority of its sales figures (rents) are known sixteen years or sixty four quarters into the future. O does exhaustive research concerning new acquisitions and only purchases and leases back to companies with solid books and steady growth.

The company is held hostage to interest rates however. During recent times of low interest rates and economic growth most companies have not had any trouble financing for expansion or development. In fact most companies have grown at record pace able to finance most growth from sales growth. During this cycle REITs like O have found themselves with moolah to acquire properties but with a much narrower market.

As interest rates continue to climb again now that the FED FUNDS Rate is being constantly upped to fight inflation and spank Americans for having too much debt and not enough savings to keep the economy healthy,at least according to the FED, Realty Income and REITs in general should enjoy more favorable lease terms and longer leases. Businesses trying to expand are going to discover that the cost of financing growth has significantly increased. These businesses, or at least the ones that meet RIs requirements will be willing to sell their real estate capitol in a lease back situation to fund expansion. Higher interest rates mean more "sales" or better selection for this company.

However REIT regulations only allow so much of revenue to be reinvested during any period. While ideally the shareholders would like a property acquisition to occur as fast as possible the company can only use so much revenue per period. The greatest percentage (95%) by law must be returned to the shareholders as a dividend in order to continue to be classified as a REIT.

No investor should ever go into a REIT looking for capitol gains. Any REIT that is managed for share price appreciation is taking on an exorbitant amount of debt in order to finance acquisitions. Realty Income for the most part has always been one of the most conservative REITs in the game. However they did recently issue preferred shares and notes. The majority of acquistions are made with FFO.

Investors in O should be concerned with the companies refusal up to now to maintain a DRIP program. A DRIP program allowing shareholders to purchase more shares prevents the shareholder from facing capitol gains liability monthly if the stock is not held in a ROTH or IRA. Some brokerages do allow the dividend to be reinvested for free. As of this time Ameritrade does not because Realty Income has neglected to do the paperwork to make such a thing possible.

Call the Realty Income investor hotline and tell them to make sure they have a DRIP set up with all major brokerages. 1-888-811-2001

Anything else is a dereliction of the duty to shareholders.

Realty Income claims that a DRIP is in the works long term but it has never developed. Demand accountability.


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Investors in O should be concerned with the companies refusal up to now to maintain a DRIP program. A DRIP program allowing shareholders to purchase more shares prevents the shareholder from facing capitol gains liability monthly if the stock is not held in a ROTH or IRA.


I too, am a long time holder of O, and I would love to see a DRIP. I need to clarify the above statement however. Dividends received and reinvested via a DRIP are subject to income taxes just the same as those that are received from holdiong the stock in any other form. DRIP participation does not exclude tax liability for any of the income which is generated by the holdings in the DRIP.

The DRIP might save on commissions if you are periodically purchasing new blocks of stock - although this depends upon the details of the DRIP plan - many DRIPs actually charge pretty hefty fees that make ther costs as high or higher than buying on the market via a discount broker.

Some brokerages do allow the dividend to be reinvested for free. As of this time Ameritrade does not because Realty Income has neglected to do the paperwork to make such a thing possible.

I have held my shares of O with Vanguard Brokerage Services for some time now. They reinvest my dividends for free - very nice. They have very high commissions on regular purchases however. I buy new shares with a discount broker and then transfer them into my Vanguard Account.

Good luck

- mclaus
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The special nature of the Realty Income dividend allows the majority of it to be taxed as Income tax and not capital gains tax. Since this stock is marketed as an income stock and the mean age of the investor is well over fifty, many would enjoy lower tax brackets than in their prime earning years.

For those that have made the high dividend an intregal part of a ROTH strategy, using the dividends to acquire equities with a higher risk/reward ratio the lack of automatic dividend reinvestment is painful.

Most brokerages will reinvest dividends with or without a DRIP in place for free. They do this as a service to their clients. However the company (issuer of the stock) does need to file some paperwork with the transfer agent-clearing house for this to occur. Realty Income has turned a deaf ear to calls to make this possible for some shareholders.

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The special nature of the Realty Income dividend allows the majority of it to be taxed as Income tax and not capital gains tax. Since this stock is marketed as an income stock and the mean age of the investor is well over fifty, many would enjoy lower tax brackets than in their prime earning years.

Hmmmm - maybe I don't understand this. The income that I have received as dividends from my holdings in O have always been taxed as ordinary income, not capital gains. My view of this is quite negative - I would much prefer that they were taxed as capital gains, which are taxed at a much lower rate than ordinary income is. But, alas, dividends ARE ordinary income and not capital gains.

This is true if the income is reinvested (via a DRIP or otherwise) or not - you still need to pay tax as ordinary income.

Now, if you hold O in a tax deferred vehicle such as an IRA or a 401(k), then you don't have to pay the taxes until you start to make withdrawls. In a Roth you would never need to pay it. But no matter how you hold your position in O I don't understand how the reinvestment plan makes a difference in your tax liability.

However the company (issuer of the stock) does need to file some paperwork with the transfer agent-clearing house for this to occur. Realty Income has turned a deaf ear to calls to make this possible for some shareholders.

I didn't realize that. It's interesting that they have responding to the requests from some transfer agents (Vanguard reinvests my O dividend for free), but not for others. I wonder why?

- mclaus
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The special nature of the Realty Income dividend allows the majority of it to be taxed as Income tax and not capital gains tax. Since this stock is marketed as an income stock and the mean age of the investor is well over fifty, many would enjoy lower tax brackets than in their prime earning years.

Hmmmm - maybe I don't understand this. The income that I have received as dividends from my holdings in O have always
been taxed as ordinary income, not capital gains. My view of this is quite negative - I would much prefer that they were taxed
as capital gains, which are taxed at a much lower rate than ordinary income is. But, alas, dividends ARE ordinary income and
not capital gains
.

This is true if the income is reinvested (via a DRIP or otherwise) or not - you still need to pay tax as ordinary income.


Dividends are not automatically taxable as income as opposed to capital. Sometimes due to the source of the declared dividend the dividend is taxed as capial gains. This is why companies issue Dividend Tax Status Reports.

The most recent report for O that I could dig up was for 1998:

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=105&STORY=/www/story/01-14-1999/0000844341

I found it on the Realty Income site through the news link. I don't know why they don't have a 1999 report. Perhaps because all dividends in 1999 were taxable as income as well and no clarification is needed.

My point about the mean age of O shareholders was merely to point out that most are already enjoying retirement and prefer the income tax classification as their dividend payments will probably not be enough to propel them from the lowest bracket. That is unless they have very significant O holdings.
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This is why companies issue Dividend Tax Status Reports.

I don't know why it isn't on their website, but if you hold your stock in a brokerage account, you probably already have the 1099 that can answer your questions.

I've held O in two different accounts this year, but for one of them I find:

Dividends: 88.58 % (box 1)
Cap gains (20%) rate: 1.26 % (box 2a)
Unrecap Gains (1250): 0.63 % (box 2c)
Return of capital : 10.75 % (box 3)

WARNING : ROUNDING ERRORS

The percentages are of the total distributions from Realty Income.

Note that "return of capital" is not taxed at all (it's your money coming back) but it DOES reduce your cost basis.

On the topic of DRPs, Realty Income is the only company which I dividend-reinvest. The high yield and monthly payout make the monthly compounding add an extra half-percent to the effective yield. It's only too bad that the stock price has been moving in the wrong direction this year. Schwab allows free reinvestment.

- Danny
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Correction. My dumb calculator error.

Dividends: 88.59 % (box 1)
Cap gains (20%) rate: 1.26 % (box 2a)
Unrecap Gains (1250): 0.63 % (box 2c)
Return of capital : 9.52 % (box 3)
WARNING : ROUNDING ERRORS
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It looks like I'm thinking somewhat foolishly, in reading about your ventures with Vanguard and Ameritrade. I'm maneuvering for the same position, excellent! Thanks for the unintentional reassurance.
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