ADC Realty (ADC 0.46%) doesn't get enough credit for its success as a dividend stock. The real estate investment trust (REIT) has a long history of growing its payout, which currently yields an attractive 3.9%. Meanwhile, earlier this year, it joined the limited ranks of companies paying a monthly dividend

The retail REIT recently gave investors another raise, adding to its impressive total this year. That upward trajectory should continue, making Agree Realty stand out as a compelling option for investors seeking to generate passive income.

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An overlooked dividend growth stock

Agree Realty has grown its dividend at a 5% compound annual rate over the last decade. It has accelerated that pace over the past year. In October, the company announced a 4.6% increase in its payout compared to the prior month. That new rate was also 9.8% above the company's dividend level at the end of last year.  

The main factor driving that dividend growth is acquisitions. The company has spent more than $1 billion to acquire 219 properties across 40 states through the end of the third quarter. That included $340.1 million of deals in the third quarter when it purchased 80 properties in 28 states.

Agree Realty isn't buying any property it can get its hands on these days. It's taking a very targeted approach, focusing on low-risk retail property acquisitions. For starters, it only buys freestanding properties net leased under long-term agreements. That lease structure generates very steady cash flow because the tenant is responsible for real estate taxes, building insurance, and maintenance. 

Further, it focuses on owning properties leased to retailers less likely to face disruption from a recession or e-commerce. For example, its third-quarter acquisitions included off-price retail, convenience stores, tire and auto service, home improvement, auto parts, grocery, and general merchandise. Also, 30.3% of the leases acquired by rent in the quarter were ground leases, which generate bond-like income streams.

Finally, Agree Realty focuses on tenants with investment-grade credit ratings. Overall, 69.8% of this year's acquisitions by annualized base rent were with investment-grade tenants, suggesting they have the financial flexibility to meet their financial obligations (i.e., make their rental payments) even during a recession.

These factors combine to give Agree Realty a very durable portfolio to support its dividend.

More dividend growth seems likely

Agree Realty should be able to continue growing its portfolio. In its third-quarter earnings release, the company noted that it expects to acquire $1.3 billion to $1.4 billion of properties this year, a $100 million increase of the low-end of its guidance range from its prior estimate. That would mark its second straight year acquiring more than $1.3 billion of properties, roughly double the pace of previous years. The company also had seven development projects under construction at the end of the third quarter totaling about $40 million that it should complete in the coming quarters.

The REIT has plenty of financial flexibility to continue making deals. It has a conservative dividend payout ratio in the low 70% range of its funds from operations (FFO) and adjusted FFO. That allows it to retain some cash to purchase properties.

Agree Realty also has a solid balance sheet. The company has investment-grade credit and relatively low leverage ratios. That gives it the borrowing capacity to make more deals. In addition, it has access to equity capital. Agree Realty recently raised $170.2 million in its first preferred equity offering. It has also steadily sold common stock to fund acquisitions, allowing it to maintain a strong balance sheet.

The company's conservative financial profile gives it the flexibility to continue making acquisitions while also steadily raising its dividend. Meanwhile, its growing scale suggests it can continue acquiring properties at an elevated pace in the coming years.

A great option for generating passive income

Agree Realty has done an excellent job growing its dividend over the years. That trend should continue given the company's solid financial profile and focus on lower-risk retail properties. Combined with its higher-yielding monthly dividend, Agree Realty stands out as a top option for investors seeking passive income backed by commercial real estate.