Passive income is a retirement savings cheat code. Capital appreciation comes and goes (ask growth investors this year), but dividend payments are cold hard cash that gets sent straight into your account. You can use them to reinvest in the source or use the cash on some other investment -- even a growth stock.
The key is to find a strong company with a history of paying and growing the dividend. Three stocks, UMH Properties (UMH 3.04%), Federal Realty Investment Trust (FRT 2.43%), and Realty Income (O 1.19%), all fit the bill and can get cash flowing into your account.
The Monthly Dividend Company
Mike Price (Realty Income): Realty Income is "The Monthly Dividend Company." Officially. It trademarked the name.
You may think that's strange, but when the company has increased the dividend every year for 25 years straight (it's also officially a Dividend Aristocrat) and is one of the most reliable monthly dividend payers, it fits.
Realty Income's entire business is built around keeping the dividend safe and growing consistently. Management focuses on tenants that offer low-cost essential items that will have demand regardless of market cycle. This means grocery stores, dollar stores, convenience stores, drug stores, and quick-service restaurants. It owns about 11,200 properties and utilizes the data gleaned from them to decide which properties to buy next.
Unlike many real estate investment trusts (REITs), Realty Income has a strong balance sheet. It has an A3 credit rating and close to $10 billion more equity than debt. Its debt has an average fixed rate of 3.6% and management assumes that about 35% of its investments will be funded with debt in the future.
Finally, the dividend payment mantra is ingrained in the management of the company. Not only did it trademark the name, but management also builds dividend payments and dividend growth into the weighted average cost of capital calculation that it uses to judge investments and its own success.
Management assumes the dividend yield will be 4.1% (right now it's 4.06%) and that it will grow 4% annually. Over the past 28 years, the REIT has increased the dividend 115 times for a compound annual growth rate of 4.4%. That means through several market cycles, stock market crashes, inflation, wars, and even a pandemic, Realty Income kept chugging along, buying more properties and returning more and more cash to shareholders.
UMH Properties delivers the dividends in all kinds of weather
Kristi Waterworth (UMH Properties): Buying a home has been a tricky situation for some time, but renting is also getting increasingly difficult. And with housing shortages in every type of residential property, that's not getting better anytime soon. This is why I am a huge fan of UMH Properties. Share prices are down from January's open of $26.55, but with a dividend yield of 3.95%, this is definitely a company that doesn't seem to notice the bear market.
The REIT specializes in affordable mobile home communities and investors' faith in its business model is being rewarded with delicious dividends. As of January, the company raised its dividend another 5.3% per quarter per share, as UMH expands its profit, footprint, and total holdings. This follows another bold 5.56% rise in dividends for 2021, and consistent distributions since 1998. Despite serious upset in 2008, UMH was able to continue to issue dividends uninterrupted.
At its core, UMH both sells and leases mobile homes in approximately 130 mobile home communities in the eastern United States. Average rental occupancy is currently 95.3%, with an average rent of $839 per unit. Compared to the median rent in the U.S. of $1,876, it's not hard to see why these units have consistently held an occupancy rate of above 92% since 2017. Since the beginning of the pandemic, as UMH has continued to develop more vacant property into additional usable mobile home lots, occupancy rates have only increased. The company predicts continued upside and growth over the next five years through both year-over-year rent increases at current properties and strategic acquisitions of existing properties that have room for adding significant value with relatively small cash investments.
All of this points to a long and happy life as a dividend-generating stock whose management team is striving for continual improvement across the board.
The Dividend King
Liz Brumer-Smith (Federal Realty Trust): As the only REIT holding the title of Dividend King, with 54 consecutive years of dividend increases, there's arguably no better REIT to hold to kick-start your passive income portfolio than Federal Realty Trust.
This net lease REIT, which owns 104 outdoor retail shopping centers in top-tier suburban and urban markets across the country, has an incredible track record for generating passive income. Over the last 20 years, the company has outperformed the S&P 500, producing an 11.55% annualized return. Its dividends have grown by 120%.
Its share price has taken a hit recently due to general market volatility and a recent downgrade in its buy price from analysts over recessionary concerns for the retail sector. However, I believe Federal Realty Investment Trust will be just fine. Having operated since 1962, this would hardly be the first downturn the REIT has lived through. Thanks to its shopping centers mainly serving higher-income families, recessionary impacts aren't felt as strongly here as at budget shopping centers or outlet stores.
It's also in a good financial position. The REIT's ratio of debt to earnings before taxes, interest, amortization, and depreciation (EBITDA) is around 6, which is slightly above the REIT average of 5. Plus it has ample liquidity of $1.3 billion in cash and cash equivalents meaning it's financially prepared to overcome a downturn in the economy.
Down 26% from recent highs, today's price is a great opportunity to get in. The company's dividend yield is 4.17% and given its Dividend King title, investors should expect dividend increases to continue well into the future.