Realty Income, AT&T, and Opera look like undervalued income plays.
The U.S. Federal Reserve finally cut its benchmark interest rate by half a percentage point in mid-September. That marked its first interest rate cut in more than four years, and it indicated it was making some progress toward taming inflation.
That long-awaited interest rate cut should also cast the spotlight back on dividend stocks, which previously lost their luster as income-focused investors pivoted toward CDs and T-bills to earn comparable or higher yields with a lot less risk. So, as interest rates decline, those investors should turn back toward dividend stocks again. If you want to profit from that rotation, you should consider buying Realty Income (O -0.62%), AT&T (T -0.64%), and Opera Limited (OPRA 0.79%).
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1. Realty Income
Realty Income is one of the world’s largest real estate investment trusts (REITs). REITs buy a lot of properties, rent them out, and are required to pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate.
Rising interest rates made REITs less appealing by making it more expensive to buy new properties. They also generated macro headwinds for their tenants as their income-oriented investors pivoted toward fixed-income investments.
But as interest rates decline, those headwinds will dissipate and Realty will become very attractive to yield-starved investors. It pays a forward yield of 5%, it pays its dividends monthly, and it’s raised its payout 127 times since its IPO in 1994.
The company owns 15,450 properties across the U.S., U.K., and Europe, and it rents them out to recession-resistant tenants across 90 industries. Some of its tenants, like Dollar Tree (NASDAQ: DLTR), have struggled with store closures in recent years — but it’s still maintained a high occupancy rate of more than 96% over the past three decades.
REITs gauge their profit growth with their funds from operations (FFO) instead of their earnings per share (EPS). Realty’s adjusted FFO (AFFO) grew at a compound annual growth rate (CAGR) of 6% from 2020 to 2023 and its stock still looks cheap at 16 times last year’s AFFO.
2. AT&T
Over the past three years, AT&T abandoned its ill-fated attempt to become a media giant by spinning off DirecTV, Time Warner, and its other smaller media assets. By divesting those businesses, AT&T streamlined its operations and raised more cash to pay off its debt and expand its higher-growth 5G and fiber businesses.
Under that fresh turnaround strategy, AT&T gained 2.9 million wireless postpaid subscribers in 2022 and another 1.7 million postpaid subscribers in 2023. Its fiber business gained 1.2 million net adds in 2022 and 1.1 million net adds in 2023, and that expansion largely offset the secular decline of its business wireline division.
AT&T’s revenue only grew 1% in 2023, but its free cash flow (FCF) rose 19% to $16.8 billion and easily covered its $8.1 billion in dividends. Therefore, it still has plenty of cash to cover its forward yield of 5% for the foreseeable future.
For 2024, analysts expect AT&T’s revenue to stay flat as its adjusted EPS grows just 3%. However, it expects its FCF to rise to $17-$18 billion for the year as it continues to trim its spending. Its stock still looks dirt cheap at 10 times forward earnings, and its high dividend yield could attract a lot more investors as interest rates gradually decline.
3. Opera Limited
Opera’s namesake web browser only controls about 2% of the market, but it still served 298 million monthly active users (MAUs) across its news app and web, mobile, and gaming browsers at the end of the second quarter of 2024. Opera’s user base is shrinking in the shadow of bigger browsers like Alphabet’s Google Chrome, Apple Safari, Microsoft Edge, and Mozilla Firefox, but it’s offsetting that pressure by rolling out new AI tools and integrated ads to boost its revenue per MAU.
That’s why analysts expect its revenue to rise 17% in 2024 and 15% in 2025. They expect its adjusted earnings to dip 53% this year as it ramps up its investments in new AI features, but they expect 23% growth in 2025 as it laps that spending. Based on those expectations, Opera’s stock looks dirt cheap at 13 times next year’s earnings.
Opera initiated a semi-annual dividend last year, it currently pays a hefty forward dividend yield of 5.4%, and it can easily cover those payments with a sustainable payout ratio of 46%. That low valuation and high yield could make Opera — which is often overlooked by both value and growth investors — a very attractive investment as interest rates come down.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in AT&T, Apple, and Realty Income. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Realty Income. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
