3 Top Passive Income Stocks to Buy With Dividends Over 5%

Long-term capital appreciation from stocks is one of the best ways to save for retirement. Over decades, if you can achieve 8% or more annual returns, that can compound into enough to retire on. In the short-term, however, market volatility can cause even the most long-term-focused investors to lose sleep.

One way to keep the faith through downturns is to add some conservative dividend-paying stocks to your portfolio. They can have the same declines as other stocks, but if you pick the right ones, they will continue churning out dividends to help set a floor on your short-term pain. The three real estate investment trusts (REITs) that we'll discuss, Iron Mountain (IRM 0.89%), Blackstone Mortgage Trust (BXMT 1.06%), and Macerich Co (MAC 0.79%), all have strong dividend yields over 5%, and could be the new backbone of your portfolio.

Iron Mountain

Iron Mountain is a combo REIT. For years it specialized in storing high-priced specialty goods like art and other records that needed to be kept secure. That analog business is still chugging along, and produced about $1.5 billion of revenue through June 2022 , 5% more than it did through the same period of 2021. But the exciting part is the data-center business.

The REIT adapted its expertise in storing sensitive files and business information to digital data centers. That side of the business generated $1 billion in revenue in the first half of 2022, up from just $775 million in 2021. That's growth of 33%. Pretty soon, the new digital business will overtake the close-to-70-year-old analog business.

Altogether, Iron Mountain had $1.83 per share in adjusted funds from operation (AFFO), which is a REIT-specific cash flow measure. Management estimates that full-year 2022 AFFO per share will be between $3.70 and $3.80. That puts the multiple at about 14, based on the recent share price of around $54. By comparison, Digital Realty, a data-center competitor, trades for about 19 times its AFFO.

Even better, the dividend yield is 4.7%. That means you get the certainty of the analog storage business, the growth prospects of the data center business, and almost 5% back in cash every year.

Blackstone Mortgage Trust

Blackstone Mortgage Trust is a mortgage REIT. Unlike other REITs, mortgage REITs don't own real estate and lease it out. Typically, they borrow money with short-term debt and use it to buy mortgages or mortgage backed securities (MBS) that have longer terms. Because of the difference in maturities and the difference in credit rating, the mortgages pay higher yields than the short-term debt costs, and the REIT makes money on the spread.

In good times, mortgage REITs are able to borrow money non-stop at low rates, buy up mortgages with enough diversification to not worry about default risk, and then pay huge dividends to shareholders. It's not unusual for a mortgage REIT to have a dividend yield over 10%. Blackstone Mortgage's is on the low end, and it's about 8.2%.

The problem is when interest rates go up. Mortgage REITs can get stuck having to roll debt over to higher and higher rates, and eventually the new short-term debt costs more than the mortgages bought years ago are paying out.

Part of the reason Blackstone Mortgage has a lower dividend yield than its peers is the types of mortgages that it buys. Blackstone Mortgage is buying corporate debt with floating rates. That means when interest rates go up its revenue does as well. You can sit back and collect more than 8% a year without worrying (as much) about interest rate risk.

Macerich

Macerich owns and operates regional malls. It isn't the type of business I would normally get excited about -- malls don't exactly bring to mind visions of growth and modernity -- but it has a 5.8% dividend yield and trades for just 75% of its book value, so why not look into it?

Macerich specializes in class A malls, what it calls "town centers" that are located in major urban and suburban areas. The REIT doesn't really own the malls where you'd go to a department store and buy your dad a tie for Father's Day -- it owns huge outdoor shopping centers that also have gyms, hotels, expensive restaurants, and other amenities around. 

The strategy is working well so far. The REIT added 900,000 square feet of new stores in 2021, and 2 million square feet of new stores signed lease contracts to open over the next three years. Debt is down $1.7 billion from 2020. And the REIT is strategically disposing of smaller-town class B malls to focus on the big-city class A malls; it raised $470 million in 2021 selling class B malls, has raised $2.2 billion since 2013, and has over $100 million more expected.

Macerich's valuation multiples are low and the dividend yield is high because investors see malls (like I initially did) and think "dead business." But if it is able to keep churning out cash flows with its new strategy, it will make the investors who dig a little deeper pretty happy.