Real estate investing can be very lucrative. However, even though the income from real estate is passive, it often takes a lot of work to make money managing property investments. That can make real estate investing stressful for those who don't have a lot of time.
A much more relaxing way to make money in real estate is by investing in Realty Income (O -0.17%). The real estate investment trust (REIT) has an extremely durable business model, which enables it to generate steadily rising rental income. That allows the REIT to pay an attractive and growing monthly dividend, making it excellent for those seeking to generate truly passive income from real estate.
Built to reduce stress
Realty Income has a very low-risk business model. The REIT focuses on investing in freestanding properties leased to tenants in industries resilient to economic downturns and the pressures of e-commerce. These properties include grocery stores, pharmacies, convenience stores, warehouses, and light manufacturing facilities. The company leases those buildings to credit-worthy tenants under long-term triple net agreements (NNN) that typically feature annual rental rate escalators. That lease structure requires that the tenant cover maintenance, building insurance, and real estate taxes. As a result, Realty Income collects steadily rising rental income from its real estate portfolio.
That enables the REIT to pay an attractive monthly dividend. Realty Income currently offers a dividend yield of nearly 5%, meaning every $1,000 invested into the REIT should generate about $50 of annual passive income.
Realty Income pays out about 75% of its quarterly cash flows to investors via dividends. That enables the company to retain a portion of its cash to help fund new real estate investments. It complements that conservative approach with a top-notch balance sheet. Realty Income has A-rated credit, giving it one of the strongest financial profiles in the REIT sector. Investors can sleep well at night knowing Realty Income is on a rock-solid financial foundation.
Reliable returns with less volatility
Realty Income's conservative approach helps drive very stable results. The company has delivered positive earnings growth in 26 of its 27 years as a public company, with the only outlier being in the depths of the financial crisis in 2009. It has grown its cash flow per share at a more than 5% compound annual rate since its public market listing in 1994. That has allowed it to increase its dividend every single year, -- including for 102 straight quarters -- while growing the payout at a 4.4% compound annual rate. That income and earnings growth combination has enabled Realty Income to deliver a 14.6% annual total return to its investors.
The company's extremely stable growth profile enables it to produce attractive total returns with much less volatility than other stocks:
Image source: Realty Income Investor Relations Presentation.
As that slide shows, the company has been one of the least volatile stocks in the S&P 500. That makes it a very low-stress investment, especially during more turbulent times. Its shares will hold their value much better than most other stocks.
The company has taken steps to further reduce risk by diversifying its portfolio in recent years. The REIT has expanded into several new property types and markets to reduce its exposure to the retail sector. Recent investments have included properties in the gaming, consumer-centric healthcare, and vertical farming sectors. It has also expanded internationally, acquiring properties in the U.K., Spain, and Italy. These deals are helping diversify its revenue streams and open new avenues to expand.
Rest easy with this REIT
Realty Income has been a great real estate investment over the years. The REIT pays an attractive and steadily growing dividend. That has helped drive strong total returns with much less volatility than other investments. It's a nearly stress-less way to invest in real estate.
