Congress created real estate investment trusts (REITs) in the 1960s to allow anyone to invest in income-producing commercial real estate. REITs must pay dividends to maintain their tax advantages, which is why most are ideal for those seeking passive income.
However, a REIT stands out above all else by its ability to generate sustainable passive income: Real estate income (O -0.11%). Here’s a look at why it’s the best way to collect passive income from real estate.
An incredible dividend history
Realty Income recently declared its 626th consecutive monthly dividend. That’s remarkable durability considering there have been a few tough real estate markets over the years. It’s also worth pointing out that Realty Income is one of the few companies that pays a monthly dividend, making it ideal for those looking to earn passive income.
The REITs takes things up a notch by constantly increasing its Dividend payment. It has given its investors 116 raises since its IPO, including in each of the past 99 consecutive quarters. Overall, Realty Income has increased its dividend for more than 25 consecutive years, calling it a Dividend Aristocrat. It is one of 65 companies to have achieved this distinction, including one of only three REITs. Realty Income has recorded annual dividend growth of 4.4% since 1994.
The basis for continuing to grow
Realty Income should be able to continue to increase its dividend in the future. A big driver is its sustainable real estate portfolio. The REIT owns nearly 11,500 independent commercial real estate properties leased to approximately 1,125 tenants in 72 areas in the United States and Europe. About 94% of its rental income comes from tenants in areas that are resilient to economic downturns and insulated from e-commerce pressures. Its major tenants include grocery stores, convenience stores, restaurants, pharmacies and industrial businesses.
The company uses triple net leases, which make the tenant responsible for variable expenses such as maintenance, building insurance and property taxes. These leases generally include fixed or inflation-indexed annual rate increases. Meanwhile, it is focused on renting to financially stable tenants, with 43% of its rents coming from those with investment grade credit ratings. These characteristics provide Realty Income with very stable rental income which should increase steadily over time.
The REIT pays a conservative amount of its income to shareholders through its dividend (approximately 75% of its adjusted funds from operations). This provides a good cushion for the dividend while allowing it to retain cash to reinvest in acquiring more income-producing real estate. Realty Income also has a low debt-to-equity ratio and A-rated credit, giving it one of the strongest balance sheets in the REIT industry. It can borrow money more cheaply and on better terms than other REITs, giving it more flexibility to make acquisitions.
Realty Income sees a huge opportunity to continue to grow its real estate portfolio in the future. It estimates that there is approximately $12 trillion of owner-occupied real estate in its major global markets, giving it a huge total addressable market. The REIT expects to complete more than $6 billion in acquisitions this year, which will help increase its rental income and its ability to continue to increase the dividend.
The REIT has also enhanced and diversified its portfolio to reduce risk. It reduced its exposure to certain segments of the retail sector and exited the office market by splitting these properties to create Orion Office REIT. During this time, it has grown its industrial and warehouse portfolio and expanded into the gaming industry. Additionally, Realty Income is expanding geographically, making its first acquisitions in continental Europe last year. It has also significantly improved its scale through needle mergers, most recently completing its VEREIT transaction last year. These actions have further improved the long-term sustainability of Realty Income’s rental income and dividends.
Built to produce sustainable passive income
Realty Income has provided its investors with a steadily growing stream of passive income for decades. The REIT should be able to continue to generate passive income in the years to come, thanks to its increasingly sustainable portfolio and its leading financial profile. This makes it the best real estate stock for those looking for passive income that can stand the test of time.