Want $2,000 in Annual Passive Income? Investing $110 in This Stock Per Week for 5 Years Could Do It

Here's one truth about retirement investing. It's not necessarily about how much money you save, it's about how much income your nest egg provides after you retire. Investing in top-quality dividend stocks can not only help you grow your money before you retire but can provide a stream of passive income in perpetuity after you do.

One stock I've been buying shares of in my own retirement portfolio for more than a decade is Realty Income Corporation (O -0.17%), and it's a big part of my passive income strategy, both now and in the future. Here's why.

Realty Income in a nutshell

Realty Income is a real estate investment trust, or REIT (pronounced "reet"), that specializes in freestanding properties occupied by retail tenants. As of the latest available information, Realty Income owns more than 13,100 properties throughout the U.S. and Europe. About 80% of its rental income is from retail tenants, but it also owns industrial, agricultural, and gaming properties in its portfolio.

Don't let the concentration in retail throw you off -- Realty Income's portfolio is designed to produce year after year of worry-free, growing, predictable income. And it achieves this in two main ways.

The first is the net lease structure it uses. If you aren't familiar, a net lease is a type of real estate lease agreement where the tenant is responsible for property taxes, insurance, and most maintenance costs. Plus, these leases tend to have initial terms of a decade or longer, with annual rent increases built in.

Second, the tenants are typically already in place when Realty Income buys a property, and they are carefully selected for their recession resistance and lack of vulnerability to e-commerce competition. Specifically, nearly all of Realty Income's tenants fall into one of four categories:

• Non-retail -- The industrial property portfolio is an example.
• Service-oriented -- Businesses that sell a service (not a physical product) are tough for e-commerce retailers to disrupt.
• Non-discretionary -- Businesses that sell things people need tend to hold up very well during recessions.
• Low-price -- Discount-oriented businesses (think dollar stores) often offer bargains even the best online retailers can't match.

A passive income machine

The proof of how well this model works is in the performance. I've called Realty Income my top overall dividend stock in the entire market, and here is why:

Realty Income has been around since 1969 but listed on the NYSE in 1994. Since its NYSE listing, the company has raised its dividend for 103 consecutive quarters at an annualized growth rate of 4.4%. It has paid 637 consecutive monthly dividends to investors, and it currently offers a dividend yield of about 5.4%.

It's not just a great income stock. Thanks to smart capital allocation as well as its growing rental income, Realty Income has delivered annualized total returns of 14.2% since its NYSE listing, and it has done this with about half the volatility of the S&P 500 index. To put this rate of return into perspective, consider that someone who invested $10,000 in Realty Income at the time of its NYSE listing 29 years ago and reinvested their dividends along the way would have about $470,000 today.

Five years could just be your starting point

Realty Income (and other rock-solid dividend stocks) can be great ways to build passive income streams, but as a final thought, five years could just be a starting point. If you put money into high-quality dividend stocks consistently over a period of decades, you might be surprised at the income you could create.

To illustrate this, let's use a nice round number ($100) for your weekly investment, and we will use Realty Income's historical returns and current dividend yield to illustrate the potential.

Data source: Author's own calculations.

Of course, this is a simplified example. It assumes that Realty Income's past performance will be the same as its average returns over the next 30 years. It also assumes that the current dividend yield (5.4%) will remain the same. Neither of these is likely to be exactly what happens. Plus, this assumes you're going to invest exclusively in one stock, which isn't a wise investment strategy.

However, the key takeaway is still valid. The numbers in the chart above show the income power of investing seemingly small amounts of money at frequent intervals in top-quality dividend stocks. It is entirely possible for a solid dividend investment strategy to result in a six-figure passive income stream after a few decades, and many people who invested in companies like Realty Income and others 30 years ago are already there.