I'm on an investing mission. I want to grow my passive investment income to match my expenses so I can achieve financial freedom. While I have a long way to go, I'm making steady progress each time I make a new income-generating investment.
I recently invested about $600 to buy even more shares of W.P. Carey (WPC -0.13%). Here's why the diversified REIT is one of my favorite places to generate dividend income these days.
A rock-solid high-yielding dividend
W.P. Carey pays a very attractive dividend. The company currently yields around 6.3%, putting it several times higher than the S&P 500's dividend yield (recently 1.6%). That allows me to generate a lot more income from my investment. My roughly $600 investment will produce about $38.50 of annual dividend income. For comparison, a similar investment in an S&P 500 index fund would only produce about $9.60 in yearly dividend income.
While higher-yielding dividend stocks are often riskier, that's not the case with W.P. Carey. The company generates very stable rental income backed by a high-quality real estate portfolio. It focuses on owning operationally critical properties in the industrial, warehouse, retail, office, and self-storage sectors leased to credit-worthy tenants under long-term triple net (NNN) agreements.
W.P. Carey expects its current portfolio to generate $5.30-$5.40 of adjusted funds from operations (AFFO) per share this year. That's more than enough to cover its current quarterly dividend payment of $1.069 per share ($4.28 annualized), giving it a reasonable dividend payout ratio for a REIT (80% at the AFFO midpoint). That provides a decent cushion while allowing it to retain some cash to fund new income-producing real estate investments.
The REIT also has a strong balance sheet. It has an investment-grade bond rating (it received ratings upgrades to BBB+ and Baa2 over the past year). W.P. Carey also has low leverage ratios and primarily long-term, fixed-rate debt with fairly well-staggered maturities. These features give it a lot of financial flexibility and help provide some insulation against rising interest rates.
W.P. Carey's steady income, reasonable payout ratio, and strong balance sheet put its high-yielding dividend on a very sustainable foundation.
Magnificent growth with more to come
W.P. Carey's high-yield dividend is only part of the draw. The REIT also has an exceptional growth track record. It has increased its dividend every year since its public market listing in 1998 and every quarter since 2001.
That consistent upward trend should continue. Two catalysts drive that view: Embedded rent growth and acquisitions.
Nearly all the leases W.P. Carey signs with tenants feature contractual rate increases. The majority link rents to inflation (37% uncapped to the consumer price index (CPI) and 19% capped). Meanwhile, another 40% of its rents rise at a fixed rate, and 3% more are either percentage rent (it participates in the gross revenue its tenants generate above a certain level) or have some other increase mechanism.
While rising interest rates have helped cool down CPI, W.P. Carey will see the benefit of elevated inflation on rent growth through at least next year. CEO Jason Fox stated in the last earnings release, "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." Embedded rental increases will grow AFFO, helping support continued dividend increases.
Meanwhile, W.P. Carey's post-dividend free cash flow and balance sheet capacity gives it the financial flexibility to continue making accretive acquisitions. The company expects to invest $1.8 billion to $2.3 billion in expanding its portfolio this year. These deals will supply it with incremental rental income that should steadily rise, driven by rental rate escalation clauses. Those dual drivers will provide more support for future dividend growth.
A fantastic dividend stock
W.P. Carey pays a high-yielding dividend that's on rock-solid ground. Meanwhile, the REIT has an excellent track record of increasing its payout, which seems likely to continue. That allows me to turn cash into an attractive and growing cash flow stream, putting me another step closer to achieving financial freedom.