In the world of investing, there's arguably nothing greater than passive income. Enough passive income can allow an investor to pursue their passions without worrying about how they are going to cover their expenses. Especially in a market downturn, there are great psychological benefits that come from receiving a steady income from your investments, which can minimize the risk of hastily selling stocks when the market feels frightening.
With dividend yields in excess of 5%, here are two real estate investment trusts (REITs) in my portfolio that investors may want to consider buying for themselves.
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1. STORE Capital
STORE Capital (STOR) boasts an $11 billion-plus real estate portfolio of nearly 3,000 properties located throughout 49 U.S. states. And it's the only REIT to earn the distinction of being partially owned by Warren Buffett.
Luckily for investors, STORE Capital is diversified in nearly every possible way one could imagine. The company's top five tenants account for just 11.7% of its annualized base rent (ABR), which drastically reduces its concentration risk with tenants. What's more, STORE Capital's top five industries -- which range from health clubs to metal fabrication -- comprise only 29.8% of its ABR.
In addition to the impressive diversification of its portfolio, the company also benefits from favorable contracts with its tenants. For starters, its weighted average lease term is 17 years. This builds a great deal of stability into STORE Capital's earnings results. Secondly, the company has average annual lease escalators of 1.8% built into its leases. Before even considering acquisitions, such automatic increases propel STORE Capital's rent revenue and adjusted funds from operations (AFFO) per share higher.
Finally, the company's average initial cap rate of 7.1% in the first quarter of this year enables it to put its capital to work producing attractive investment returns. And with STORE Capital retaining approximately 31% of its AFFO after paying its dividend to shareholders, along with its annual lease escalators, the company boasts solid AFFO per share growth. That explains how STORE Capital has generated 5.7% annual AFFO per share growth and 6.1% annual dividend growth over the years.
Given that STORE Capital's total addressable market is just shy of $4 trillion, mid-single-digit annual AFFO per share and dividend growth should continue well into the future. This is especially attractive when considering the stock's 5.8% dividend yield, which is nearly quadruple the S&P 500 index's 1.6% yield.
Yield-focused investors can pick up shares of STORE Capital at a forward price-to-AFFO-per-share ratio of just 11.9 -- hardly an excessive valuation for a blue-chip REIT.
2. Simon Property Group
Simon Property Group's (SPG -0.68%) owns more than 200 well-known shopping, entertainment, dining, and mixed-use destinations, which makes it the largest mall REIT in the U.S.
Despite concerns in recent years that Simon's properties will fall victim to powerful e-commerce retailers, the company appears strong and unfazed. While consumers do favor convenience, shopping is often just as much about building memorable experiences as it is getting the right product quickly and at the right price. This sentiment is reflected in a recent survey, which found an overwhelming majority (76%) of consumers valued experience over all else, including material items.
For that reason, I believe that both e-commerce and brick-and-mortar retailers can thrive at the same time with the right approach. In fact, Simon is looking to capitalize on this trend, and is redeveloping its properties to help them better compete in a changing environment.
When it comes to building up passive income, don't let Simon's staggering 7% dividend yield fool you into thinking the payout is unsafe. The stock's dividend payout ratio in its most recent quarter was just above 61%, which builds in a margin of safety for future dividend raises. Best of all, shares can be snatched up at a forward price-to-AFFO-per-share ratio of merely 8.4.
