Typically, individuals looking to retire will only be partially supplemented by their Social Security income. Building up your passive income is important to a successful retirement because it can bridge the gap between your Social Security income and expenses.
My favorite source of passive income is dividend income. That's because, when done right, investors can see their income grow each year to keep up with inflation. Investing $10,500 in each of these real estate investment trusts (REITs) could help you haul in $1,000 in annual dividend income right off the bat.
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1. Digital Realty Trust
Data centers are physical locations that compute and store data. In this digital age, data centers are the glue that holds everything together. When individuals, businesses, or governments need to check emails or complete online transactions, they rely on properly functioning data centers to do so.
Economic expansion and emerging technologies like virtual reality should translate into promising growth for the data center industry. This is why the market research firm Allied Market Research anticipates that the global data center industry will grow at 10.5% each year from $187.4 billion in 2020 to $517.2 billion by 2030.
Digital Realty Trust (DLR 1.98%), with more than 290 data centers in 26 countries around the world, is among the largest data center REITs in the world. This leadership positions the company well to benefit from the industry's robust growth outlook in the years ahead.
NYSE: DLR
Key Data Points
Digital Realty's core funds from operations (FFO) per share growth in years to come won't be the 10% annual rate that it has been since 2005. But this is because of the law of large numbers and not because of deteriorating fundamentals. The law of large numbers states that a company's growth will decelerate as it increases in size. This is because it takes more to move the growth needle and fewer growth opportunities become available at a certain point.
However, I believe that Digital Realty will post mid-single-digit annual core FFO per share growth over the medium term. With the dividend payout ratio set to be 71.2% in 2022, the dividend should grow in line with core FFO per share.
Mid-single-digit annual dividend growth is an attractive proposition since Digital Realty offers investors a sizable dividend yield of about 3.8%. A $10,500 investment in the REIT would purchase roughly 80 shares, which would generate $390 in starting annual dividend income for investors. This makes Digital Realty an excellent REIT for investors looking to build significant passive income for the long haul.
2. STORE Capital
With a portfolio of nearly 3,000 properties in 49 U.S. states valued at $11.2 billion, Warren Buffett-backed STORE Capital (STOR +0.00%) is one of the largest REITs focused on single-tenant properties.
NYSE: STOR
Key Data Points
The REIT provides tenants with a source of capital in exchange for ownership of their commercial real estate, which helps tenants expand their businesses or pay down their debt. The tenants then lease back the real estate that they sold to STORE Capital and agree to pay all of the expenses and a monthly base rent check to the REIT.
Along with the initial lease terms of more than 10 years and contractual annual lease escalators, this provides steadily growing rent revenue to STORE Capital. This is how the company has delivered 5.7% annual adjusted FFO per share growth during its time as a public company.
With 2 million potential location and $3.9 trillion addressable market, STORE Capital's growth potential should remain strong in the decades ahead. And given that its dividend payout ratio was 67.5% in the first quarter of 2022, STORE Capital looks like it is retaining plenty of capital to fund future growth opportunities.
That's why I believe that STORE Capital's dividend will grow about 5% to 6% annually over the medium term. Paired with the stock's whopping 5.8% dividend yield, this makes it an ideal mix of starting income and future income. A $10,500 investment in the stock would purchase 398 shares, which would produce $613 in starting annual dividend income.
