Passive income has been hard to come by over the past several years with interest rates sinking to extremely low levels. Low interest rates are great for stock investors in general, as they support higher prices. However, they are tough for income investors.
Real estate investment trusts (REITs) have been a fertile place to find income, but many are also in businesses that can be highly cyclical -- which means the dividends aren't always dependable. But here is one income stock that has the Warren Buffett seal of approval.
Store Capital has the Oracle of Omaha's seal of approval
Store Capital (STOR) is a holding of Warren Buffett's Berkshire Hathaway, and it's a classic Buffett-type stock. The company's name is an acronym for Single-Tenant Operational Real Estate. It's a REIT that leases its properties under long-term rental agreements called triple-net leases, in which the tenant bears most of the operational costs, including taxes, insurance, and maintenance.
Store Capital predominantly acquires its properties via sale and leaseback transactions. In a sale and leaseback transaction, the corporate owner of the property agrees to sell it to a buyer who immediately leases it back to the corporate seller. In essence, the corporate tenant goes from being an owner to a renter. One of the big benefits of sale and leaseback transactions is vacancy. Since the property is already occupied, there is no need to market it, and there are no problems with unoccupied properties.
At the end of 2021, Store Capital had a portfolio of 2,866 properties. Store continually analyzes its tenants' finances both at the corporate and individual store level and decides whether the property remains a good investment. It generally charges a base rent, which has automatic escalators that allow the company to charge more based on inflation. Since tenants pay most of the operating expenses, Store's main expenses are at the corporate level and borrowing costs.
Given that commercial real estate prices have been steadily rising and most of Store's tenant base is in defensive industries, the dividend should be relatively stable. Last year, Store Capital's funds from operations (FFO) per share came in at $2.05 per share, and so its annual dividend of $1.54 was well covered.
Store is a steady dividend payer
Here's how Store Capital can give you $1,000 of passive income over three years. Store currently pays $0.385 per share in dividends every quarter. If you own 217 shares of stock, that will give you about $334 in dividends for the full year (217 shares times $0.385 per quarter times four quarters). Over three years, that's a little over $1,000. And at the recent stock price around $26.50, 217 shares will cost you $5,750.
Even if it doesn't make sense for you to invest quite so much in Store Capital, the stock's dividend yield of 6% makes it worth considering for any income investor. And Store has proven its reliability. While many REITs were cutting their dividends during the COVID-19 pandemic, Store Capital raised its dividend in 2020 and 2021.
Triple-net lease stocks are generally not exciting businesses, but they do tend to throw off a decent amount of cash and tend to be steady performers. They are good core holdings for an income investor's portfolio.
