Generating passive income from your investments can be immensely rewarding. Most people put their blood, sweat, and tears into their paychecks, but owning shares of real estate investment trusts (REITs) means that you get paid for simply being a part-business owner; no other effort necessary.
Unlike buying a rental property, buying REITs is very affordable. Indeed, $500 can put you well on your way to building a diversified portfolio of REITs that send money your way over and over again. Here are some quality REITs to consider.
First, why are REITs such great dividend stocks?
REITs are businesses that function as landlords; they acquire and rent properties to tenants, which are often other businesses.
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REITs can own virtually any property type, including residential housing, medical facilities, retail and commercial buildings, office space, and more. REITs are required to pay out at least 90% of their taxable income to investors as dividends and avoid corporate income tax as a result.
Congress established the REIT business structure to give citizens the ability to benefit from real estate without owning property. An investor can use REITs to build a diverse collection of investments with exposure to virtually any type of property they want.
STORE Capital
Net lease REIT STORE Capital (STOR) rents to single-occupant tenants, individual businesses that occupy the whole building, versus buildings like shopping malls or plazas. Net leases mean that STORE acquires and leases out its properties, and the tenant pays all of the upkeep, like property taxes, insurance, and maintenance, which means a lower-risk, more predictable income stream for STORE.
STORE Capital has a diversified tenant base, where no individual tenant represents more than 3.1% of its income. This protects the company's cash flow from a major tenant leaving or going out of business. Its largest tenants include Ashley HomeStore, Camping World, Bass Pro Shops, and AMC. Just 2% of STORE's tenants do less than $5 million in annual revenue, so these are large businesses that are likely more reliable than the "mom-and-pop" shops paying their rent month to month.
STORE's balance sheet is rated investment-grade by the major credit rating companies like S&P, and its dividend payout ratio is 70% of cash flow. STORE has grown its dividend for seven consecutive years, and it yields 5.1% on the current share price. It builds 2.5% growth into its lease agreements through annual escalators, which help keep STORE's yearly cash flow (called funds from operations) growing year in and year out.
W.P. Carey
Another net lease REIT, W.P. Carey (WPC 2.85%), carries a lot of similarities to STORE. The company assumes less risk and expenses by maintaining net leases with its tenants but targets a very different market. Roughly three-quarters of W.P. Carey's rental income comes from industrial, warehouse, and office building spaces.
W.P. Carey is well-diversified; its largest tenant makes up just 3.2% of its income, and notable tenants include U-Haul parent company Amerco, the Spanish government, Marriott, and Advance Auto Parts. The company's portfolio totals more than 1,200 properties, so W.P. Carey is one of the larger REITs in the industry.
Financial discipline is key to long-term success as a REIT, and W.P. Carey passes this test; its balance sheet holds investment-grade ratings from the major credit companies. The company's about to become a Dividend Aristocrat; the dividend has been paid and raised for 24 consecutive years and yields 5.6% at the current share price. Its dividend payout ratio is slightly higher at 87%, but the company has little debt due over the next three years and can continuously raise funds through built-in rent escalators or asset sales.
Public Storage
Owning storage facilities could be one of the most overlooked types of property. Public Storage (PSA 0.04%) dominates as the world's largest owner, operator, and developer of self-storage buildings. It boasts a portfolio of more than 2,500 facilities across America. Storage is an underrated property type; it's in nearly constant demand as people relocate or simply need a place to put their stuff.
STORE and W.P. Carey own the buildings that its commercial tenants operate out of, collecting rent, invisible to the consumer. You wouldn't walk into an AMC movie theater and know that AMC doesn't own the theater building or who they pay rent to. Public Storage, on the other hand, is consumer-facing. Individuals and businesses are walking into Public Storage-branded facilities to rent storage units.
Public Storage pays a solid dividend that yields 2.3% but hasn't raised it in several years. Don't assume that Public Storage is in financial trouble, however. Its balance sheet has a strong investment-grade rating from the credit companies, and the dividend payout ratio is just under 75%.
The company's invested aggressively in growth, acquiring competitor ezStorage for $1.8 billion in cash, which closed last spring. Its funds from operations, the cash income that REITs measure performance by, grew 30% year over year in its most recent quarter, Q3 of 2021. Investors should look for dividends to continue growing again over time.
