Building a passive income stream from your portfolio is a dream that's closer to being in reach than many investors suspect. If you pick the right dividend-paying stocks with high yields, it might not take a very big investment -- but the trick is to buy shares of the companies that'll sustain their dividend forever.
On that note, here are a pair of real estate investment trusts (REITs) that have high yields, sustainable dividends, and growth prospects for the next decade and beyond. You won't need to break the bank with your investment to get $1,000 each year in dividends with either, and neither should need to change much about its business model to keep flourishing.
1. Medical Properties Trust
As Medical Properties Trust (MPW 7.42%) derives its income from investing in hospitals and clinics which it then rents, renovates, or sells, demand for its offerings won't be declining anytime soon. It owned 447 properties globally as of June 30 of this year, with plans to acquire a handful more already in action. And with a weighted average lease length and loan maturity of 17.7 years, its tenants don't need replacing very often, which adds to the stability of its cash flows. Plus, thanks to its baked-in rental rate increases, investors won't need to worry about inflation eroding their returns over the long-term hold that'll be necessary to get the most out of the dividend.
Though its total return of only 138% over the last 10 years wasn't enough to beat the market and it's unlikely to ever beat the market, the stock's passive income potential is still quite strong. With a super-high forward dividend yield a hair over 8.8%, you won't need to buy too many shares of Medical Properties Trust to make a grand in annual passive income -- roughly $11,890 worth, in fact.
Of course, even a business supplying space for healthcare providers isn't immune to headwinds that investors should be aware of. Specifically, the cost of borrowing money as set by the Federal Reserve has a big effect on Medical Properties' ability to grow, as it finances new property acquisitions and investments with debt. Furthermore, it currently holds around $10.1 billion in debt, whereas its trailing-12-month (TTM) net income totals $1.2 billion. That means as taking out new debt gets more expensive, it'll have a harder time building or buying new properties to rent out.
Thankfully, slow growth isn't much of a surprise to most REIT investors, and while this company has slashed its dividend in the past, its payout appears safe for now.
2. Innovative Industrial Properties
Unless your landlord is Innovative Industrial Properties, (IIPR 2.78%) they probably don't want you growing cannabis on their property. Cultivating marijuana is business as usual for Innovative Industrial's tenants. The company operates more than 110 indoor growing spaces across the U.S. Much like with Medical Properties Trust, this REIT's weighted average lease length is 16 years, so investors can expect a minimum amount of turnover, thereby leading to relatively consistent cash flows.
To grow its business, IIP performs sale-leaseback transactions, meaning it trades cannabis companies a lump sum of cash in exchange for the ownership of their property, in which the original owner remains as a rent-paying tenant. Given the recent meteoric growth of the cannabis industry, that model has been a winner, with its TTM net income rising by 725.1% in the last three years, reaching almost $134 million.
The biggest risk is if its tenants don't capture enough of that growth to pay their rent. This summer, one of the company's renters, a cultivator called Kings Garden, defaulted on its obligations, causing IIP's shares to plummet and for the REIT to start litigation against it. But, as of September 11, Kings Garden entered into a settlement, and presumably Innovative Industrial will get some form of compensation as a result, though the terms of the settlement weren't disclosed. Other defaults might be in the future, though that's par for the course when it comes to REITs and shouldn't be overly alarming to investors. And it'd take quite a lot of chaos for the defaults of smaller tenants to threaten the business' dividend anyway.
Right now, its forward dividend yield is near 7.5%, so you'll need to invest around $13,351 to get an annual income of $1,000. Once you make that purchase, you're likely to find that your passive income from IIP increases as its dividend rises. Since the last quarter of 2019, its payout has grown by a whopping 124.4%.
While it probably won't continue to grow at that rate, as the company is subject to the same rising interest rate constraints as Medical Properties Trust, even a slight deceleration would still leave investors who buy shares today with more income than they started with after a short period of a few years. And that's a compelling reason to buy it.