There are many ways to collect passive income. However, some take more work or money to get started than others. One of the easiest ways to make passive income is to invest in real estate investment trusts (REITs), entities Congress created in 1960 to allow anyone to own income-producing commercial real estate.
While most REITs pay dividends to their investors, some are better suited for those seeking to make passive income than others. Three REITs built for those who love passive income are Realty Income (O +0.78%), Medical Properties Trust (MPW 0.21%), and Equity Residential (EQR +0.13%).
NYSE: O
Key Data Points
Made for this
Matt DiLallo (Realty Income): Few investments are better suited for passive income production than Realty Income. The REIT, which calls itself The Monthly Dividend Company, has an excellent track record of paying a durable and growing dividend. It has paid 625 consecutive monthly dividends throughout its history. Meanwhile, it has increased the dividend payment 116 times since its public market listing in 1994 -- including in the last 99 straight quarters -- growing it at a 4.4% compound annual rate.
The backbone supporting Realty Income's monthly dividend is its resilient real estate portfolio. The REIT owns nearly 11,300 free-standing properties triple-net leased (NNN) to 1,090 tenants across over 70 industries. It primarily focuses on tenants resilient to economic downturns or the pressure from rising e-commerce sales. Meanwhile, NNN leases insulate it from variable expenses like maintenance, building insurance, and real estate taxes, enabling it to produce very stable rental income.
Realty Income complements its durable portfolio with a top-notch financial profile. It has one of the highest credit ratings in the REIT sector, allowing it to borrow money at more attractive rates to fund acquisitions. Meanwhile, the REIT has a conservative dividend payout ratio of around 75% of its adjusted funds from operations. That provides an additional cushion for the dividend while enabling it to retain cash for funding acquisitions.
The REIT's growing scale and financial capacity give it the confidence that it can make more than $5 billion of acquisitions this year. It should have plenty of opportunities since there's an estimated $12 trillion of owner-occupied commercial real estate in its core North American and European markets, providing it with a vast acquisition opportunity set. Future deals should enable Realty Income to continue growing its rock-solid monthly dividend, making it an excellent option for those who love collecting passive income.
Strong dividend history and a buy opportunity
Marc Rapport (Medical Properties Trust): Medical Properties Trust is one of the world's largest private owners of hospitals, with about 440 properties and 46,000 licensed beds in 10 countries.
Shares of stock in this Birmingham, Alabama-based REIT are down about 30% so far this year, but the company has a long record of feeding its faithful with a nice flow of passive income. And that depressed share price has pushed the yield up to about 7.3%.
NYSE: MPW
Key Data Points
That payout performance is not a new thing. MPT has raised its dividend at least a little every year for nine straight years, including by about 4% annually for the past three years. Since its 2005 IPO, it has provided shareholders a total return of 428%, easily outpacing the 351% posted by the S&P 500 during those same years.
That key metric of funds from operations (FFO), meanwhile, continues to be strong, up 12% in Q1 2022 from the year-ago quarter with a very reasonable, by REIT standards, payout ratio of about 62% -- pointing to continuing payouts without a pause.
Speaking of FFO, here's another indicator of just how cheap MPT stock may be right now. Its price/trailing-12-months FFO per share ratio right now is about 6.2. That's a lot of bucks for not so much bang. By comparison, Welltower, one of the largest healthcare REITs, is trading at a price/FFO ratio of nearly 27.
Concerns about the company's ability to keep growing its portfolio have helped hold down its share price, but CEO Edward Aldag said in the Q1 2022 earnings announcement that plans continue for $1 billion to $3 billion in acquisitions this year.
Meanwhile, long-term leases with built-in rent increases and a portfolio that includes a diversified mix of 53 different operators of general acute care hospitals, inpatient rehab, urgent care facilities, and a growing number of behavioral health centers should continue to make Medical Properties Trust a good choice for income investors going forward.
NYSE: EQR
Key Data Points
Benefitting from rising home prices
Brent Nyitray (Equity Residential): Equity Residential is a REIT that specializes in luxury apartments for young, affluent urban professionals. The company focuses on select housing markets that have strong job growth and an elevated housing market. These markets are typically characterized by constrained housing inventory.
Equity Residential's markets include Southern California, the Bay Area, Seattle, Washington, D.C., Boston, New York City, and Dallas. Its apartment units are often in urban areas, close to the typical tenant's office.
Rising real estate prices have been the story of the post-COVID landscape, with the FHFA House Price Index up nearly 19% over the past year. In many of these urban areas, price appreciation has been even higher as many apartment dwellers chose to leave the cities during the pandemic. This ended up working against Equity Residential in 2020 and 2021 as it "bought occupancy," which means it often gave incentives like a couple months of free rent or additional amenities. This depressed funds from operations during the pandemic and the immediate aftermath, however these sub-market leases are largely gone.
Rents generally follow house prices, so this gives the company a runway to increase rents going forward. While home price appreciation will probably normalize (high-teens real estate inflation simply isn't sustainable), the supply and demand imbalance is so stark that a decline in home prices is unlikely.
The typical tenant for Equity Residential is a high earner who would probably like to buy a property, but high prices and mortgage rates make that difficult. In the meantime, they will probably wait out the market and continue to rent.
The company's first quarter of 2022 missed the Street's expectations, and the stock fell along with the market in the aftermath. The company has a dividend yield of 3.4%, which is an attractive yield in this market.
