This year will likely go down as one of the more challenging ones for investors in decades. Stock prices have tumbled more than 25% on average as the Federal Reserve raises interest rates to combat red-hot inflation.

However, there is a silver lining to the sell-off in the stock market. Dividend yields move in the opposite direction of share prices. Because of that, investors can lock in higher yields on some attractive dividend stocks, enabling them to generate more passive income from a lower initial investment.

For example, you'd need to buy 118 shares of diversified real estate giant W.P. Carey (WPC 0.92%) to collect $500 of passive annual income, given its current dividend payment. The total cost of those shares is now 20% less than at their peak earlier this year due to the sell-off in W.P. Carey's share price and, subsequently, higher dividend yield of 5.9%. Here's a look at why W.P. Carey is an excellent option for those seeking to collect passive income. 

A great foundation for the dividend

W.P. Carey is a real estate investment trust (REIT) that owns operationally critical commercial real estate. The diversified REIT has 1,390 properties in the warehouse, industrial, office, retail, self-storage, and other property sectors. It net leases (NNN) these properties to high-quality operating tenants under long-term agreements. That lease structure makes the tenant responsible for building insurance, maintenance, and real estate taxes. As such, they provide W.P. Carey with a very stable rental income. The company also has a portfolio of 84 operating self-storage properties that provide additional income. 

Nearly all of W.P. Carey's leases feature some sort of contractual rent growth. About 57% of rents escalate based on the inflation rate, 39% at a fixed rate, and 3% from other mechanisms. Because of that, W.P. Carey's same-store annual base rent steadily grows. Meanwhile, with inflation running hot, the growth rate has doubled over the past year from 1.5% to 3%, thanks to its inflation-linked rental contracts.

The company's high-quality real estate portfolio provides it with steadily rising cash flow to support its dividend. It currently pays out $1.061 per share each quarter ($4.24 per share annualized), meaning you'd need to buy 118 shares to produce $500 of annual passive income. That would cost roughly $8,425 at the company's recent share price of around $71.50 apiece. 

W.P. Carey can easily afford that dividend. The REIT expects to produce $5.22 to $5.30 per share of adjusted funds from operations (AFFO) this year, giving it a roughly 80% dividend payout ratio. That gives it some cushion while allowing it to retain 20% of its cash flow to help fund new investments. 

But wait, there's more

W.P. Carey's attractive current passive income stream is only part of the draw. The company has an elite track record of growing its payout. It's one of only a handful of REITs to increase its dividend every year as a public company. In W.P. Carey's case, it has grown its dividend each year since 1998, with it historically giving investors a small raise each quarter.

The company should be able to continue growing its dividend in the future. The foundation of that view is its current high-quality real estate portfolio, which should supply it with steadily growing rental income backed by contractually guaranteed rate increases.

The other growth driver is W.P. Carey's ability to continue expanding its real estate portfolio. The company uses its retained earnings and the flexibility afforded to it by its solid investment-grade balance sheet to acquire additional income-producing properties. 

The company made $1.1 billion of new real estate investments through the first half of 2022, putting it on track to spend $1.75 billion to $2.25 billion on expanding its portfolio this year. The company also acquired a non-traded REIT it managed in a $2.7 billion deal. These new investments will immediately boost its AFFO per share while steadily increasing its rental income over the long term through contractual rate increases. That should enable W.P. Carey to continue growing its dividend and provide more passive income to its investors. 

A great foundation for collecting passive income

W.P. Carey has done an excellent job of paying a sustainable and growing dividend over the years. With its stock down 20% from its peak, pushing the yield higher, investors don't need to invest as much money to put them on track to produce a $500 (and growing) annual passive income stream. That makes W.P. Carey an excellent foundational investment for generating passive income.