There are many ways to start earning passive income. One tried and true method is investing in real estate. While there are many options, the lowest-cost and most passive way is through real estate investment trusts (REITs).
For example, $3,750 invested evenly across Realty Income (O 0.52%), W.P. Carey (WPC 0.27%), and Medical Properties Trust (MPW -1.51%) should generate more than $1,000 in cumulative passive income over the next five years. Here's a closer look at that math and why these REITs are great options for investors looking to start collecting some passive income.
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Growing passive income streams
Realty Income, W.P. Carey, and Medical Properties Trust stand out as some of the best REITs for income-seeking investors. All three REITs offer above-average dividend yields ranging from 4.3% to 6.4%. Furthermore, they have a long history of growing their dividends. Because of that, we can project their future income streams with relatively high confidence.
For example, $1,250 invested in each REIT should generate around $200 in combined annual passive income over the next year. If we assume no dividend growth, this trio will produce slightly less than $1,000 of cumulative passive income over the next five years. However, if we forecast that they can continue growing their payouts at a low single-digit annual rate, they'd easily surpass $1,000 of cumulative passive income:
Data source: Author calculations. Chart by author.
Why these REITs should deliver sustainable passive income growth
While most REITs pay dividends, not all are great options for investors seeking to generate passive income. Some REITs pay a below-average dividend because they retain more cash to expand their portfolios. Meanwhile, other REIT dividends look unsustainable due to their lack of growth prospects or worrisome financial profiles. That makes Realty Income, W.P. Carey, and Medical Properties Trust stand out because they pay above-average dividends that they can sustain and grow in the coming years.
Realty Income has grown its dividend for more than 25 straight years. The REIT focuses on owning properties triple-net leased (NNN) to tenants resistant to disruption from e-commerce and economic downturns. That lease structure provides very stable rental income, while its tenant focuses help insulate its portfolio from deteriorating market conditions.
Meanwhile, the REIT has a top-tier financial profile, giving it the flexibility to pay an attractive dividend while acquiring more cash-flowing real estate. Realty Income has grown its dividend at a 4.4% compound annual rate since its initial public offering (IPO) in 1994. Given its strong financial profile and durable portfolio, the REIT seems likely to continue producing a growing passive income stream.
W.P. Carey has given its investors a raise each year since its IPO in 1998. It owns a diversified portfolio of operationally critical real estate net leased to tenants in the office, industrial, warehouse, retail, and self-storage sectors. That diversification and those lease structures helped provide W.P. Carey with stable rental income to support its dividend and continue acquiring more income-producing commercial real estate. Add in its solid balance sheet, and W.P. Carey should be able to continue steadily increasing its dividend for years to come.
Finally, Medical Properties Trust delivered its ninth consecutive annual dividend increase this year. The hospital-focused healthcare REIT has grown its payout at a 3.8% compound annual rate since 2018. The REIT leases those properties to hospital operators under net leases, providing it with very stable rental income. Meanwhile, it has a solid balance sheet and healthy dividend payout ratio, giving it the flexibility to pay its dividend while continuing to acquire hospital real estate. Medical Properties sees an enormous opportunity to continue purchasing hospitals, which should allow it to keep growing its dividend.
A great way to start generating passive income
REITs are an easy place to begin collecting passive income. A relatively small investment in a handful of high-quality REITs can produce a surprising amount of passive income over a few years. Because of that, those who want to start receiving some passive income should take a closer look at Realty Income, Medical Properties Trust, and W.P. Carey.
