Creating passive income, even at the most basic level, should be a part of every investor's portfolio goals. Dividend stocks, exchange-traded funds (ETFs), and bonds are what a lot of investors flock to when searching for passive income streams, but they aren't the only options. Real estate can be a brilliant avenue for creating consistent and reliable monthly income.
Real estate investment trusts (REITs), in particular, are fantastic passive income investments because they allow investors to participate for less money, time, and risk than traditional real estate investments. If you're looking to earn regular passive income, here are three great REITs to consider.
The all-star of dividend investing
Many consider REITs the all-stars of dividend investing thanks to the nature of the REIT structure. In order for a REIT to receive certain tax benefits like paying zero corporate tax, it must follow strict criteria. For example, it must derive the majority of its income from real estate and real estate-related securities, like mortgages, and pay 90% of its taxable income in the form of dividends.
These qualifications often lead to superior dividend returns when compared to traditional dividend-paying stocks. Since most REIT dividends grow as the company's portfolio and performance grow, the passive income potential from a REIT is endless.
1. National Retail Properties
National Retail Properties (NNN +0.31%) is a single-tenant net-lease REIT that rents roughly 3,200+ retail properties to long-term tenants in 48 states. Favorable net leases pass the responsibilities of owning and maintaining the property onto the tenant for a period of 15 to 20 years. Incremental rent increases are built into the lease, creating a super-reliable and consistent income stream for the company.
Its single-tenant business model, targeting non-institutional tenants and national operators in high-traffic areas of select markets, has proven extremely successful over the years. Its occupancy has never fallen below 96.4% in the nearly four decades of operation and its operations, despite pandemic impacts, are better than ever. As of the first quarter of 2022, it collected 99.6% of its rents while occupancy sits at an impressive 99.2%.
NYSE: NNN
Key Data Points
The company is also in a great financial position having $53.7 million in cash with no debt maturities until 2024, plus a low debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.3 times, which is in line with the REIT average. Plus, its dividend is hard to beat. National Retail Properties has raised its dividend for 32 consecutive years, making it among the few Dividend Aristocrat stocks and the third-longest of all public REITs.
Market volatility and concern over recessionary impacts on the retail industry have pushed share prices down 14% this year. However, this is to investors' advantage. Its price is trading favorably to its performance, and its dividend return is now over 5%.
2. Realty Income
Realty Income (O +0.31%) is also a net-lease REIT that primarily rents single-tenant retail properties in addition to a smaller but diversified range of properties like hotels, offices, and vineyards, to name a few. Its tenants are in nearly every field imaginable, with institutional quality tenants like Walgreens, 7-Eleven, Dollar General, or FedEx, in addition to many others.
This giant REIT, which has an interest in just under 11,300 properties across the United States and Europe, is a Dividend Aristocrat as well, having raised its dividend 115 times in the course of the 25 years since its IPO. Plus, it pays its dividends monthly. It's also one of the only A-rated retail REITs, and it boasts a healthy balance sheet with a low debt ratio of around 5.4 times its EBITDA.
NYSE: O
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Market volatility hasn't hit Realty Income as hard as many of its REIT peers. Right now, its share price is sitting around 12.5% lower than it was at its recent high. However, it's still priced favorably with its dividend return at 4.4%, which falls in line with its historic return range.
3. W.P. Carey
W.P. Carey (WPC +0.06%) is a diversified REIT that owns and leases a slew of different real estate properties, including industrial, self-storage, office, and retail, among a few others. This asset diversification offers the company and its investors a hedge against market volatility because if one industry sees rents compress, another may see rents grow. This balancing act between the industries helps the company maintain steady growth despite short-term headwinds in the different industries and reduces its risk exposure.
As of Q1 2022, W.P. Carey has interest or ownership in just over 1,300 net-lease commercial properties in the United States and Europe and has an impressive 98.5% occupancy. It's in the process of closing on a merger with Corporate Property Associates 18 Global (CPA 18) -- which is expected to add around $2 billion in assets to its portfolio by year's end. Its balance sheet is healthy, with its debt ratio just above the REIT average at 5.5 times its EBITDA.
NYSE: WPC
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The company isn't a Dividend Aristocrat -- yet. It's just one year shy of hitting the 25-year mark for consistent dividend increases. Thankfully, its low payout ratios mean it's in a strong position to maintain dividend growth without compromising its performance. Surprisingly, W.P. Carey is one of the few REITs that are up despite today's bear market. Despite a slightly higher share price, its dividend is still over 5%, within the historical range.
These three REITs can offer consistent income backed by proven track records for portfolio and dividend growth while offering exposure to the real estate market. If passive income is your goal, these 3 REITs are a surefire buy.
