I really want to become financially independent. I don't like the stress of worrying about how I'll make a living if AI eventually takes my job. This desire is driving me to grow my sources of passive income. My goal is to eventually generate enough passive income to cover my basic living expenses. That way, I won't have to fret if my income from working were to disappear.
My foundational strategy is investing in high-quality, high-yielding dividend stocks. One of my core holdings is W.P. Carey (WPC 0.97%). I recently bought more shares of the high-yielding real estate investment trust (REIT), which I expect to continue doing in the future. Here's why I believe W.P. Carey can help me reach financial independence through passive income.
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Built for income
W.P. Carey owns a well-diversified portfolio of high-quality, operationally critical properties across North America and Europe. It primarily invests in single-tenant industrial, warehouse, retail, and other properties secured by long-term net leases with built-in rent escalations. Net leases provide it with stable rental income because tenants pay all property operating costs, including routine maintenance, real estate taxes, and building insurance. Meanwhile, the rental income tends to rise each year as its leases escalate rents. Forty-seven percent of its leases climb at a fixed rate, while 50% are tied to inflation.
The diversified REIT aims to pay out 70% to 75% of its stable cash flow in dividends. That gives it a comfy cushion while allowing it to retain some cash to fund new income-generating real estate investments.
W.P. Carey also has a rock-solid investment-grade balance sheet. It maintains a conservative leverage ratio with a target in the mid-to-high fives range. The ratio came in at 5.8 at the end of the first quarter. Its strong balance sheet gives it the capacity to continue paying dividends and growing its portfolio during more challenging times.
The combination of stable income and financial strength puts W.P. Carey's high-yielding dividend on a sustainable foundation. For context, its 5.8% yield is about four times higher than the S&P 500's sub-1.5% dividend yield.
Dual growth drivers
W.P. Carey has more embedded rent growth than the typical net lease REIT because more of its leases feature escalation clauses that link rates to inflation. That strategy has paid off in more recent years as elevated inflation has driven faster rent growth for W. P. Carey. Its same-store annual base rent rose at a 2.4% annualized pace in the first quarter and has increased by as much as a 4.3% annualized rate in recent years. For perspective, leading net lease REIT Realty Income expects to capture only around 1% annual base rent growth this year because of lower annual fixed rental rate escalations.
New investments are W.P. Carey's other growth driver. It expects to spend between $1 billion and $1.5 billion to add new properties to its portfolio this year. It has already secured nearly $450 million of new investments in the first quarter, including a $136 million, 59-property sale-leaseback transaction with Reddy Ice for industrial and warehouse properties in the United States. It also had about $120 million of development projects scheduled for completion this year and several hundred million dollars of additional deals in advanced stages in the pipeline.
The company plans to internally fund its 2025 investment rate through post-dividend free cash flow, non-core asset sales, and new debt while remaining within its targeted leverage range. W.P. Carey intends to sell between $500 million and $1 billion of properties this year, primarily self-storage properties not currently secured by net leases. It's also selectively selling retail and warehouse properties linked to lower-quality tenants. The REIT can increase its investment rate if market conditions improve by selling stock to fund additional new investments.
Rising rental income and portfolio growth positions W.P. Carey to grow its cash flow per share. That allows the REIT to raise its dividend. It has hiked its payment level every quarter since resetting its dividend following its strategic decision to exit the office sector in late 2023 by selling and spinning off those properties. Before that, W.P. Carey had increased its dividend at least once annually for a quarter century.
An attractive and steadily rising income stream
W.P. Carey has everything I want in a passive income investment. The REIT's portfolio generates very stable cash flow to support its high-yielding dividend. It also has the financial flexibility to grow its portfolio, which allows it to steadily increase its dividend. That attractive and growing income stream will help me reach my passive income target sooner. It's why I keep buying shares of W.P. Carey and expect to continue adding to my position in the future.
