Berkshire Hathaway's chief executive officer Warren Buffett is well known for his remarkable insights into personal finance and investing. One of my favorite quotes from the Oracle of Omaha is, "If you don't find a way to make money while you sleep, you will work until you die."
As a dividend growth investor, it's no secret that I'm biased toward dividends as a form of passive income to achieve financial independence.
The first $1,000 in annual dividend income arguably takes the longest to achieve because investors need to set aside capital to invest and don't yet really have the benefit of compounding. But investors with $22,000 available to invest can take the first step toward financial independence by making these two real estate investment trusts (REITs) part of a diversified dividend stock portfolio.
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1. Realty Income
The first REIT to consider buying is Realty Income (O 0.11%). With a $43 billion market capitalization, it is the seventh largest REIT in the world. The company's portfolio consists of more than 11,100 properties throughout the U.S., Puerto Rico, the United Kingdom, and Spain.
With its top five markets -- Texas, the United Kingdom, California, Florida, and Illinois -- contributing only 35% of its annualized base rent (ABR), Realty Income is geographically diverse.
The company is also diversified by industry: It's top five industries -- grocery stores, convenience stores, dollar stores, drugstores, and quick-service restaurants -- account for 40% of ABR.
Realty Income's portfolio diversification, annual lease escalators linked to inflation, and steady expansion of the business have led to impressive results. The company's adjusted funds from operations (AFFO) per share have grown at a median annual rate of 5.1% since 1995, which is much higher than the 3.9% REIT average.
But despite its size, Realty Income looks poised to continue delivering above-average growth for the foreseeable future. That's because its portfolio has barely scratched the surface of what management estimates is a U.S. and European commercial real estate market worth $12 trillion.
And with a dividend payout ratio of 79.9% in 2021, the stock is retaining enough capital to continue growing its dividend in line with AFFO per share. This should translate into 4% to 5% annual dividend growth, which is especially attractive considering the stock's market-beating 4.1% dividend yield.
At the current $72 share price, Realty Income is trading at a reasonable ratio of price to AFFO per share of 18.4. Investing $11,000 in the stock would purchase 153 shares and generate $453 in annual dividend income.
2. VICI Properties
The second REIT to purchase is VICI Properties (VICI 1.93%). The stock's $21 billion market cap makes it the largest experiential REIT in the world. Upon the closing of its acquisition of MGM Growth Properties (MGP) that's expected in the first half of this year, VICI Properties' portfolio will expand to 43 famous properties. These include the casino resorts MGM Grand, Mandalay Bay, and Caesars Palace.
Thanks to the renown of VICI Properties' assets and the quality of its tenants, the company has delivered a 7.8% annual dividend increase to shareholders over the last three years. And despite this strong growth, the dividend remained safe with a payout ratio of 72.4% in 2021. This is because VICI's AFFO per share has grown at an even higher 10.7% annually over the past three years.
And the REIT appears to offer income investors the best of both worlds with a market-smashing 5% dividend yield. Investors can scoop up shares at a ratio of price to AFFO per share of just 15.7. An $11,000 investment in the stock would purchase 386 shares, which would produce $556 in annual dividend income.
