Investing in dividend-paying stocks is one of the numerous ways to generate passive income. Many companies pay dividends, giving investors lots of options.
However, the best passive income producers share two things in common. They offer an above-average yielding dividend that they steadily increase.
Real estate giant W. P. Carey (WPC +0.28%) delivers both. The REIT currently yields 5.8% and has increased its payout every year for nearly a quarter-century. It can turn a $1,000 investment into a $58 and growing annual passive income stream.
NYSE: WPC
Key Data Points
Built on a rock-solid foundation
W. P. Carey owns a $25 billion commercial real estate portfolio. It's well diversified by property type, including warehouses, industrial, office, retail, self-storage, hotels, and others. At its core, the company owns high-quality properties that are operationally critical to their tenant. It primarily leases these properties under long-term triple net leases (NNN) to credit-worthy tenants, making them responsible for variable costs like building insurance, real estate taxes, and maintenance.
The company's property and leasing strategy enables it to generate very stable rental income. It expects to produce $5.30 to $5.40 per share of adjusted funds from operations (FFO) this year, which is the free cash flow it could pay to shareholders in dividends. With its current annual dividend rate at $4.268 per share, W. P. Carey has a solid dividend payout ratio for a REIT of less than 80% of its adjusted FFO. That gives it a nice cushion while allowing it to retain cash to invest in expanding its portfolio.
W. P. Carey also has a solid investment-grade balance sheet. It has a relatively low leverage ratio for a REIT, primarily fixed-rate debt with staggered maturities, and lots of liquidity. These features give it additional financial flexibility to invest in growing its portfolio.
Dual growth drivers
W. P. Carey has increased its dividend every year since going public in 1998. Dual factors have helped drive dividend growth.
The first is rent growth. W. P. Carey signs long-term net leases that almost always feature some type of annual rental rate escalation clause. Currently, 57% of its leases rise at a rate linked to inflation, while another 40% rise at a fixed rate.
With inflation elevated these days, W. P. Carey's rents are rising faster than usual. CEO Jason Fox noted this impact in the company's recent first-quarter earnings release. He stated, "Even though there is evidence that inflation is beginning to cool, we expect our contractual same-store rent growth to remain elevated -- averaging around 4% in 2023 and over 3% in 2024 -- given the lag on which CPI-linked escalations flow through to rents." That's more than double the company's rent growth in 2020 and 2021. Rising rents provide a nice base for dividend growth.
W. P. Carey's other growth driver is acquisitions. The company primarily acquires properties in sale-leaseback transactions with companies that rely on them to support their operations. The REIT closed $178 million of deals during the first quarter and another $566 million already in the second quarter. The biggest deal was a $468 million sale-leaseback of four pharmaceutical R&D and manufacturing campuses in Canada. The 20-year lease escalates by 3% annually, supplying the company with a steadily rising rental stream.
On the recent first-quarter conference call, Fox stated: "The investment environment remains constructive, and we're on track to close meaningfully higher investment volume relative to last year. We have an active pipeline, including several hundred million dollars of investments at various stages with a handful of early stage opportunities in Europe." The company expects to close $1.75 billion-$2.25 billion of investments this year, well above last year's volume of $1.4 billion. These additions will provide it with incremental income in 2023 and growing rental streams in future years. That provides further support to grow the dividend.
An excellent passive-income producer
W. P. Carey has been a great dividend-paying stock over the years. That should continue in the future. It's on a rock-solid foundation with a strong portfolio and financial profile. These features allow it to grow its rental income organically and by acquisition. It's a great option for investors seeking to generate passive income.
