It's hard to believe it's already December. That means 2023 is right around the corner.
That makes now a great time for investors to position their portfolio for the year ahead. If you're seeking to generate more passive income next year, you might want to consider starting now. Three Fool.com contributors think Realty Income (O +0.88%), Simon Property Group (SPG +2.63%), and W. P. Carey (WPC +1.41%) are great buys for passive income seekers heading into 2023.
Realty Income just keeps delivering the dividends
Marc Rapport (Realty Income): A company that markets itself as "The Monthly Dividend Company" must be able to actively grow passive income if that moniker is to ring true. That's no problem for Realty Income.
NYSE: O
Key Data Points
This giant among retail real estate investment trusts (REITs) has paid shareholders without fail for 629 consecutive months and has raised that payout 117 times since going public in 1994. Over that time, its portfolio has grown to more than 11,700 properties occupied by commercial clients under long-term, net-lease agreements that require the tenant to pay for maintenance, insurance, and the like while the landlord just collects the rent.
That rent comes from a diverse list of 1,147 clients operating in all 50 states, Puerto Rico, Spain, and the United Kingdom, and anchored by such essential retailers as Walgreens Boots Alliance, 7-Eleven, and Dollar General. The company also just got into casinos this year with the purchase of Encore Boston Harbor from Wynn Resorts.
Meanwhile, a rock-solid balance sheet, among the highest credit ratings in the REIT industry, and a long-term record of growing dividends (4.4% on average per year since 1994) and its funds from operations (FFO) (5.1% per year since 1996) just point to more outperformance going forward. And at a share price of about $62 that's currently down some 12% so far this year -- and a respectable yield of about 4.8% -- it also could be a relative bargain at the checkout aisle.
You can confidently buy shares of this real estate trust this holiday season and give yourself or some other recipient a gift that will keep on giving through 2023 and beyond.
Despite headwinds, the consumer remains strong
Brent Nyitray (Simon Property Group): With investors worrying about a potential recession in 2023, stocks that cater to the consumer have been selling off. One stock that has been beaten up is Simon Property Group, a mall REIT. As of Sept. 30, Simon owned 197 income-producing properties including shopping malls, premium outlets, the Mills, along with lifestyle centers. The company also owns 80% of the Taubman Group and a stake in a French retailer.
Despite a steady diet of 75-basis-point hikes in the federal funds rate, the consumer has remained remarkably resilient. According to the Census Bureau, retail sales rose 8.3% year over year in September, which contains the back-to-school shopping season and is generally a good predictor of the holiday shopping season. On the third-quarter earnings conference call, Simon Chief Executive Officer David Simon reported that sales per square foot in its mall properties rose 15% year over year to $749 a square foot, which was a record for the company.
Despite fears that e-commerce would spell the end of brick-and-mortar retailing, shoppers still like the experience of being able to try on clothes in the store, make returns, and enjoy the other lifestyle features of a shopping mall. Retailers agree, as Simon's occupancy rate rose to 94.5% compared to 92.8% a year ago.
Simon has guided for full-year 2022 funds from operations per share to come in between $11.83 and $11.88 per share. REITs like to use funds from operations as opposed to earnings per share because depreciation and amortization is a big noncash charge that depresses earnings per share. Funds from operations give a better representation of the cash flows of the company. At the midpoint of guidance, Simon is trading at 10 times guided FFO per share. It also has a 6% dividend yield.
A milestone year ahead
Matt DiLallo (W. P. Carey): W. P. Carey is having a great year. The diversified REIT is on track to grow its adjusted FFO per share by over 6% this year. The REIT is benefiting from new investments and the impact of inflation on its rental contracts.
The REIT made a record $1.73 billion of new investments last year, which are providing a boost in 2022. Meanwhile, it acquired an additional $1.3 billion of properties during the first nine months of this year, putting it on track to spend between $1.5 billion and $2 billion on new investments. In addition, the company acquired a non-traded REIT it managed, adding another $2.2 billion of net assets.
On top of all this, most of W. P. Carey's rental contracts feature inflation-linked rate increases. With inflation running hot, rents are rising faster. Same-store rents grew 3.4% in the third quarter, more than double the rate of recent quarters.
These catalysts should carry over into 2023. In its third-quarter earnings release, W. P. Carey CEO Jason Fox pointed out, "as current CPI numbers flow through to rents, we expect our same-store growth to move even higher in 2023, and to continue seeing the benefits into 2024." In addition, W. P. Carey will continue to get a boost from acquisitions. Fox noted that "deal pricing is increasingly getting more interesting."
All these factors point to W. P. Carey being able to continue increasing its dividend, which yields an attractive 5.3%. The REIT has expanded its payout each year since its public listing in 1998. That puts the company on track to hit the 25-year milestone of consecutive annual dividend increases in 2023. That's something passive income investors won't want to miss, which is why they should buy shares of W. P. Carey before 2022 ends.
