Real estate investment trusts (REITs) can be great for generating passive income. Most REITs pay above-average dividends backed by steady rental income.
However, some REIT dividends are safer than others. Three of the safest in the sector are those paid by Prologis (PLD -1.69%), Camden Properties Trust (CPT -0.03%), and Realty Income (O 1.46%).
A massive safety net
Prologis is a rock-solid dividend stock. The leading industrial REIT pays a slightly above-average dividend (it yields 1.8% vs. the S&P 500's 1.4% dividend yield). Prologis backs that payout with an exceptional financial profile and a high-quality real estate portfolio.
It owns a global portfolio of logistics properties secured by long-term leases with high-quality tenants. That portfolio generated about $3.2 billion of funds from operations (FFO) last year. Those funds covered the company's more than $1.9 billion dividend outlay with plenty of room to spare. That enabled Prologis to retain cash to fund its development program. Prologis also has a top-tier balance sheet with A-rated credit, giving it significant financial flexibility.
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Prologis' already prodigious cash flow has enormous upside. Thanks to strong demand for industrial properties, the company has an embedded $1.2 billion income opportunity as existing leases expire and it captures the current market rental rates. Meanwhile, it sees further upside to rental rates due to strong demand for logistics real estate. On top of that, it has a large pipeline of development opportunities to further grow its income.
Prologis' combination of cash flow, conservative payout ratio, strong balance sheet, and upside potential put its payout on one of the safest foundations in the REIT sector. It will also enable the REIT to continue growing its dividend.
Ratcheting up the safety profile
Camden Properties Trust also boasts of having an ultra-safe dividend. The apartment REIT currently offers an above-average 2.3%-yielding payout. It supports that with a top-notch financial profile and a well-located real estate portfolio.
Apartments tend to be resilient investments because of relatively steady demand. However, Camden takes things a few steps further to provide additional support to its dividend. For starters, it focuses on owning apartments in 15 of the fastest-growing markets, primarily in the Sun Belt region. Demand for apartments in that part of the country is strong, which has occupancy and rental rates rising. That's providing Camden with a fast-growing rental income stream to support the dividend. It also has a reasonably conservative dividend payout ratio at around 60% of its adjusted FFO even after providing its investors with a sizable boost for 2022.
In addition, Camden has A-rated credit, backed by a low leverage ratio and limited near-term debt maturities. That balance sheet flexibility combines with its retained post-dividend cash flow to give Camden the funds to expand its portfolio. The REIT has several apartment development projects underway that should help grow its FFO in the coming years. That should allow Camden to continue increasing its dividend.
A REIT built with dividend safety in mind
Realty Income built its business to deliver dependable dividends to its investors. The retail REIT currently offers a 4.4%-yielding payout that it supports with one of the most conservative investment approaches in the sector.
Realty Income owns a large-scale portfolio of single-tenant properties net leased to high-quality tenants. The REIT focuses on triple net leases because the tenant covers maintenance, insurance, and real estate taxes. As a result, Realty Income generates very stable rental income. Meanwhile, it focuses on properties essential to the tenant's operations. While it primarily concentrates on retail (80% of its portfolio), it owns properties resistant to economic downturns and e-commerce pressures. It has also steadily diversified its portfolio. It recently acquired diversified REIT VEREIT and its first gaming property.
Meanwhile, Realty Income has a top-tier financial profile. It had a conservative dividend payout ratio of 76.7% of its AFFO in the most recent quarter and an A-rated balance sheet backed by a low leverage ratio for the REIT sector. That gives it the financial flexibility to continue expanding its portfolio and growing its AFFO. That steady growth has enabled Realty Income to increase its dividend for more than 25 straight years.
Great REITs for investors seeking a rock-solid passive income stream
Prologis, Camden Property Trust, and Realty Income stand out as some of the lowest-risk REITs for dividend seekers. All three own high-quality real estate portfolios backed by some of the strongest financial profiles in the sector. Because of that, these REITs will have no problem continuing to grow their dividends in the future.
