The key to a successful retirement is generating enough income from passive sources so that you no longer have to work to make money to cover your expenses. There are many possible sources of retirement income, including from a pension, social security, rental properties, and dividend stocks.
Dividend stocks can be great sources of passive income for retirement. Three dividend stocks that have been passive income machines over the years are Getty Realty (GTY 0.74%), Rithm Capital (RITM 1.08%), and W. P. Carey (WPC 1.62%). Here's why three Fool.com contributors think that makes them great ways to help fund a retirement.
Getty Realty pumps out the payments from a portfolio of gas stations and other auto service businesses
Marc Rapport (Getty Realty): Funding a comfortable retirement typically requires a reliable income stream to supplement Social Security or other defined benefit plans that buttress your nest egg.
One of the less tricky ways to do that is to buy shares of stocks with solid dividend payout records and business models that keep the income stream growing, not just going. Real estate investment trusts (REITs) are a natural place to start that search.
There are some uber popular choices here, such as Realty Income and American Tower, but I'd like to point out a somewhat less covered but promising REIT: Getty Realty.
Getty Realty owns more than 1,000 single-tenant properties housing car washes, convenience stores, gas stations, auto parts stores, and similar businesses in this recession-resistant sector. Its holdings are spread across 38 states, adding geographic diversity, and it's growing, with plans to add 44 more properties using $150 million in its investment pipeline.
The company also is continuing to grow its funds from operations (FFO), the cash flow it uses to pay dividends, ratcheting FFO per share up by 260% over the past decade, and that's while nearly tripling the total return of the benchmark Vanguard Real Estate ETF and nearly equaling that of the S&P 500 over that span. At this writing, it's yielding a respectable 5.15%.
Of course, rising FFO doesn't automatically translate to a rising stock price, but it does point to the ability to keep paying and growing dividend payouts. Getty has raised its dividend each year for the past 10 years, including by 4.9% in October. That kind of commitment to shareholder return makes this REIT a real consideration for a retirement portfolio. It has a place in mine.
This mortgage REIT is built to thrive in all interest rate environments
Brent Nyitray (Rithm Capital): Rithm Capital is a mortgage REIT with an interesting mix of businesses that allows it to perform well in most interest rate environments. The company was recently renamed Rithm from New Residential to highlight its different lines of business. Rithm is a combination mortgage originator and mortgage REIT. Mortgage REITs are different from typical REITs in that they don't follow the typical landlord/tenant model. Instead of investing in real estate and collecting rents, mortgage REITs invest in mortgage-backed securities and collect interest.
Rithm has outperformed the typical mortgage REIT and mortgage originator this year. This outperformance is due to one asset in particular: mortgage servicing. Mortgage servicing is an interesting asset in that it is one of the few that react positively to rising interest rates. Mortgage servicers perform the administrative tasks of the mortgage on behalf of the investor. They collect the monthly mortgage payment, forward the requisite principal and interest payments to the individual bondholders, ensure that property taxes and insurance is paid, and deal with the borrower if they start missing payments. The servicer is compensated 0.25% of the value of the mortgage for this service. The right to perform this service is worth something, and its value will increase as interest rates rise.
Rithm Capital is expected to earn $1.29 per share this year, which works out to be a 6.5 price-to-earnings (P/E) multiple. Single-digit P/Es are often considered cheap in most sectors, but that is normal in mortgage banking. Mortgage banks generally don't command premium multiples. The stock pays a dividend of $0.25 per quarter, which works out to be a 11.9% dividend yield. This is a 78% payout ratio, which is pretty conservative for a REIT.
Built to pay a growing dividend
Matt DiLallo (W. P. Carey): One challenge many retirees face is they're on a fixed income, yet their expenses often rise with inflation. They can combat that problem by finding passive income sources that steadily grow to help cover their rising costs.
W. P. Carey fits that description. The diversified REIT has been a passive income machine over the years. It has increased its payout each year since its public listing in 1998, giving its investors a raise almost every quarter.
One factor enabling W.P. Carey to consistently increase its dividend is its lease structure. The company leases its properties to tenants under long-term triple-net leases (NNN). They make the tenant responsible for the rising costs of building insurance, maintenance, and real estate taxes. Meanwhile, nearly all feature an annual rental rate escalation clause. More than half its leases feature one tied to inflation, giving it an extra boost during periods of higher inflation. Overall, its leases supply it with steadily rising rental income. That gives W. P. Carey a solid foundation on which to grow its dividend.
The company enhances its inflation-driven rental growth by acquiring additional income-producing properties. W. P. Carey routinely buys more than $1 billion of real estate each year. Those acquisitions boost its income in the first year while supplying it with steadily rising rental revenue in those that follow. That enhances W. P. Carey's ability to pay a growing dividend.
Add in W. P. Carey's higher dividend yield (it's currently 5.5% compared to 1.7% for the S&P 500), and it's an ideal choice for those seeking a reliable passive income producer to help fund their retirement.