I've spent the past few years trying to build up my passive income streams. I want to eventually get to the point where I won't have to work for income. That would give me more peace of mind, knowing that I would be just fine if I lost my ability to work or had to take a pay cut.
I'm continually siphoning some of my income from working into investments that generate passive income. One passive income producer I can't get enough of these days is Realty Income (O +0.21%). The real estate investment trust (REIT) does a phenomenal job paying dividends.
NYSE: O
Key Data Points
A financial fortress
Realty Income recently declared its 649th consecutive monthly dividend of $0.263 per share or $3.156 annualized. With the stock price currently around $57.50 a share, the REIT yields around 5.5%. That's several times higher than the S&P 500's 1.3% dividend yield.
That high-yielding dividend is on an extraordinarily sound foundation. The REIT generates very stable cash flow because it focuses on owning durable real estate. It has a diversified portfolio of around 15,500 properties leased to over 1,500 tenants in 89 industries across the U.S. and parts of Europe. About 90% of its rent comes from properties net leased to tenants resilient to economic downturns or the pressures of e-commerce, like essential retailers, warehouses, industrial facilities, and gaming properties.
That durability has been on full display over the years. The REIT has delivered positive earnings growth in 27 of the past 28 years.
Meanwhile, Realty Income has a very conservative financial profile. Its dividend payout ratio was less than 75% in the first quarter, which is lower than many REITs. Realty Income also has one of the strongest balance sheets in the REIT sector. It's one of only eight in the S&P 500 with two bond ratings of A3/A- or better. Those features give it tremendous financial flexibility.
Unstoppable growth
Realty Income's durable portfolio and conservative financial profile have enabled it to steadily grow its portfolio and dividend. Last month, the REIT delivered its 126th dividend increase since its public market listing in 1994, and its 107th straight quarterly increase. The company has grown its payout at a 4.3% compound annual rate over the past three decades.
The REIT should have no problem continuing to increase its payout in the future. The company anticipates that internal growth drivers -- particularly rising rents and acquisitions funded with retained cash flow after paying dividends -- should lift its adjusted funds from operations (FFO) by 2% per share annually. That provides a nice foundation for growing the dividend.
Realty Income also expects to continue making externally funded acquisitions. The REIT estimates that every $1 billion of deals financed by selling stock and issuing new debt will yield about 0.5% in incremental adjusted FFO-per-share growth each year. It conservatively calculates that it can make enough externally funded new investments to deliver 4% to 5% annual adjusted FFO-per-share growth, around its historical average.
There should be no shortage of investment opportunities. The company estimates that the total addressable market for net lease real estate is $5.4 trillion in the U.S. and $8.5 trillion in Europe. It typically sources more than $50 billion of new investment opportunities each year. It selectively closes those that should yield the best risk-adjusted returns; it closed only 16% of the $59 billion of deals it sourced last year. The company has been steadily expanding its opportunity set by adding new property types (gaming facilities and data centers), geographies (additional European countries), and investment structures (preferred equity) to its portfolio, enhancing its ability to keep growing.
A passive income machine
Realty Income is a model passive income investment for me. The REIT's high-yielding dividend is on an extremely sustainable foundation. It has done a phenomenal job increasing that payout, which seems almost certain to continue for many years to come. It should supply me with a steadily rising income stream. That should help me achieve my goal of financial freedom through passive income much faster. It's why I can't stop buying shares whenever I have more cash available to invest.
