Berkshire Hathaway's billionaire chairman and chief executive officer, Warren Buffett, is known for many of his quotes filled with wisdom. One of my favorites is: "If you don't find a way to make money while you sleep, you will work until you die."
Sure, people can lean on income from Social Security in their golden years. But that typically only pays 40% of the average wage earner's pre-retirement income. Overall, investing in some type of asset that will appreciate and/or pay reliable passive income in the form of dividends is the only way to total financial freedom.
There is, of course, no guarantee that companies will pay consistent or growing dividends forever, but some investments have better chances than others. Real estate investment trusts (REITs), for example, are legally obligated to pay out a significant portion of earnings in the form of dividends. As a result, investors with $16,800 available to invest could generate starting annual dividend income of $1,000 by evenly splitting their investments between these two REITs right now. And if you don't have this much starting capital to invest, the good news is that this can scale based on how much you have.
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1. VICI Properties
When speaking of casinos, it's often said that the house always wins. This is because the probability of its customers winning a jackpot is far outweighed by those same customers losing the money wagered for a chance at winning the jackpot, resulting in revenue for the casino.
VICI Properties (VICI 0.18%) is a landlord to major casino operators like MGM Resorts International and Caesars Entertainment. The REIT owns 43 of the best properties in the world, like the MGM Grand Las Vegas. And it is the go-to company when casinos want to unlock the value of their real estate by selling it and leasing it back.
NYSE: VICI
Key Data Points
This allows casinos to invest in business expansion or to repay debt. And it benefits VICI Properties, too: The REIT has a 43-year weighted average lease term, and nearly all its leases will be linked to the inflation rate over the long haul. Before even considering potential property acquisitions, this builds in both rent revenue visibility and growth potential right off the bat.
These characteristics have allowed VICI Properties' dividend to compound at nearly 8% annually in the past three years. This growth was funded by similar adjusted funds from operations (AFFO) per share growth during that time. This is why the stock's dividend payout ratio of 77% is only slightly higher than its targeted payout ratio of 75%. This should enable at least mid-single-digit annual dividend growth moving forward, which is an attractive amount of growth potential considering VICI Properties' market-smashing 4.6% dividend yield. For context, this is nearly triple the S&P 500 index's 1.6% yield.
Best of all, income investors can snatch up shares of VICI Properties at a forward price to AFFO per share ratio of just 16.3. An $8,400 investment in the stock could purchase 267 shares, generating $384 in starting annual dividend income.
2. Medical Properties Trust
Few business models are as stable as hospitals. Each year, fewer than 1% of hospitals close. With a portfolio of roughly 440 hospitals around the world valued at $22.2 billion, Medical Properties Trust (MPW 0.55%) is a leading financer of hospitals.
NYSE: MPW
Key Data Points
Hospitals receive an infusion of capital in exchange for selling their real estate to the REIT and leasing it back. Hospitals can use these funds to expand their patient reach or repay debt. The hospitals agree to pay all the costs associated with their leased properties and cut a base rent check to Medical Properties Trust each month.
And if that wasn't enough, Medical Properties Trust's initial lease terms are for 10 to 20 years in the U.S. and even longer internationally. In addition to 99% of the company's leases being linked to either inflation or fixed increases, Medical Properties Trust's rent revenue and AFFO per share can rise with each passing year.
Despite the company's impressive portfolio size, the company still has much room to continue growing in the years ahead. That's because its portfolio is just a fraction of the $1 trillion-plus global hospital real estate market. With Medical Properties Trust retaining approximately 20% of its AFFO to reinvest in property acquisitions, the company has the capital necessary to continue growing as well. This makes its astonishing 7.3% dividend yield safe.
And at a consensus AFFO multiple of less than 11, Medical Properties Trust is dirt cheap. Investors with $8,400 can pick up 531 shares of the stock, which would throw off $616 in starting annual passive income.
