A core aspect of my investment strategy is to generate passive income. I currently reinvest most of that money into producing more income and hope to eventually generate enough passive cash flow to cover all my expenses.
One of my favorite passive-income investments right now is W. P. Carey (WPC 0.47%). I've added to my position in the diversified real estate investment trust (REIT) several times over the past year and plan to continue buying shares in the future. Here's why I'm buying shares of this top-notch dividend stock hand over fist these days.
Meeting my needs
W. P. Carey has the two things I desire in a passive-income investment: It offers an above-average yielding payout that steadily rises. With a 5.9% yield following a nearly 20% slide in the share price from its 52-week high, W. P. Carey satisfies the first qualification. That's several times above the 1.7% dividend yield of an S&P 500 Index Fund.
W. P. Carey also has an elite track record of growing its dividend:
Image source: W. P. Carey.
As that slide showcases, the REIT has increased its payout every year for nearly a quarter-century. Further, it has given investors a raise almost every single quarter since 2001.
Built on a strong foundation
W.P. Carey can easily sustain that high-yielding payout. The REIT generates very steady rental income. It owns a diversified commercial real estate portfolio across the industrial, warehouse, retail, office, and self-storage property classes. It focuses on owning properties that are operationally critical to its tenants, increasing the likelihood that they continue paying rent and renewing the leases upon expiration.
The company primarily utilizes triple net leases (NNN). This structure makes the tenant responsible for covering variable costs like building insurance, maintenance, and real estate taxes. Because of that, it generates very stable cash flow to pay dividends.
W. P. Carey pays a reasonable percentage of that steady income via its dividend. It expects its dividend payout ratio to be less than 80% of its adjusted funds from operations (FFO) in 2023. That gives it a nice cushion while allowing it to retain some excess cash to fund new investments.
Meanwhile, the company has a solid investment-grade balance sheet with lots of liquidity. That gives it additional financial capacity to make new investments.
Room to grow
W. P. Carey has an excellent track record of making accretive acquisitions. The REIT made over $1.4 billion of new investments in 2022. It also completed a $2.7 billion merger with a non-traded REIT it used to manage. These deals are helping drive growth in 2023.
The company expects to continue making new investments this year. It's targeting $1.75 billion to $2.25 billion of investment volume. It has already completed $743.5 million of investments and has more deals in the pipeline.
W. P. Carey's existing portfolio is another growth driver. The company signs long-term net leases, nearly all of which feature some form of annual rate-escalation clauses. More than half its leases escalate at rates tied to inflation. With inflation elevated these days, rents are growing faster than their historical pace.
That should continue in the near term. CEO Jason Fox stated in the first-quarter earnings report: "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."
The company's dual growth drivers should enable it to continue increasing its high-yielding dividend.
An exceptional passive-income producer
W. P. Carey provides an above-average and steadily rising passive-income stream that aligns perfectly with my investment strategy. With the company's share price down over the past year (driving up the dividend yield), I've been gobbling up shares. I expect to continue buying them hand over fist for as long as they remain this attractive.
