There are few things better than passive income. Getting paid month after month and year after year without having to work for it is a pretty magical thing. One of my favorite ways to earn passive income is by investing in real estate investment trusts (REITs). 

REITs are some of the best dividend stocks because their structure requires them to pay 90% or more of their taxable income to shareholders as dividends. This leads to higher dividend returns, more consistent payouts, and the bonus of diversification into real estate.

National Retail Properties (NNN -1.09%) is one of the most reliable dividend REITs. Right now, a $10,000 investment in the stock could net you roughly $480 in annual passive income. Here's a closer look at this dividend stock and why you might want to add it to your buy list.

People working in an auto repair shop.

Image source: Getty Images.

Doing retail differently

National Retail Properties is a single-tenant retail REIT that leases its roughly 3,270 properties to a diverse range of retail operators through long-term net leases.

The net lease is the most popular type of lease in the commercial industry because it puts most of the heavy lifting on the tenant for things like repairs, maintenance, and property taxes. What distinguishes National Retail Properties' business model is its focus on single-tenant buildings that are primarily leased to noninvestment-grade tenants that aren't susceptible to e-commerce competition.

Single-tenant retail can be risky because revenue and occupancy levels take a big hit if and when a tenant leaves. But National Retail Properties has used this risk to its advantage. The company acquires properties in top-tier real estate locations and does thorough due diligence on tenants before leasing to them. Leasing to noninvestment-grade tenants means they can purchase and lease at better prices while leaving room for bigger, investment-grade tenants to take over the lease through acquisitions. For example, its biggest tenant, 7-Eleven, only became a tenant through acquisitions of smaller tenants.

It has clearly worked. Right now, occupancy is 99.2%, far greater than its retail REIT peers, and its occupancy has never fallen below 96.4% in its over 30 years of operation.

It does have some lingering rent deferrals from COVID-19 related closures, but its performance remains strong with revenue, earnings, and funds from operations (FFO) -- an important metric used to value a REIT -- growing year over year.

Person holding money and cheering.

Image source: Getty Images.

Why National Retail Properties is a dividend dream

For the past 20 years, National Retail Properties has provided an 11.6% total annual return, outpacing the S&P 500 during that same time while increasing its dividend by 65%. It has raised its dividends for 32 consecutive years.

The company is also in a strong financial position with $53.7 million of cash on hand and no debt maturities until 2024. Its payout ratio is a very manageable 67% of its FFO, and its debt-to-EBITDA (earnings before taxes, income, depreciation, and amortization) is just slightly higher than the REIT average of 5 times. In other words, it's in an ideal operational position to continue paying dividends and grow its business.

The company's stock is still down 17% from pre-pandemic levels, likely due to lingering concerns for retail with the pandemic. But today's share price is an advantage for investors. According to its price-to-FFO (a metric for REITs that works similarly to price-to-earnings for traditional stocks), it's priced favorably right now at around 14 times its FFO. Plus, its dividend return of 4.8% makes a $10,000 investment go a long way.