My top financial goal is to generate enough passive income to cover my basic living expenses. I'm starting to worry about the potential impact AI will have on my income. That's leading me to focus on making investments that will generate passive income to help alleviate this concern.
Investing in high-quality dividend stocks is the foundation of my investment strategy. While I already own several, I recently added NNN REIT (NNN 0.36%) to my portfolio. Here's why I think it can help me achieve my goal of reaching financial freedom through passive income.
Image source: Getty Images.
A very simple strategy
NNN REIT is about as straightforward an investment as you'll find. It's a real estate investment trust (REIT) focused on single-tenant properties secured by long-term triple-net leases (NNN). It primarily invests in retail and service properties, including automotive service locations (18.4% of its annual base rent), convenience stores (16.2%), and restaurants (8% limited service and 6.5% full-service).
These properties tend to produce a reliable income stream with low volatility. Tenants cover property operating expenses, taxes, and routine capital expenditures. Meanwhile, NNN leases tend to have 10- to 20-year terms and typically escalate rents at a low single-digit annual rate.
NYSE: NNN
Key Data Points
While NNN REIT focuses on retail properties, it strives to have a well-diversified portfolio to further lower its risk profile. It currently owns nearly 3,700 properties across 50 states, leased to more than 400 national and regional tenants in over 35 lines of trade. Its largest tenants are 7-Eleven (4.3% of its rent), Mister Car Wash (3.9%), and Dave & Buster's (3.7%). It owns properties in main street locations, providing a strong market for replacement tenants if the current tenant defaults or doesn't renew.
A bankable and growing dividend
NNN REIT's dividend currently yields more than 5.5%. That's higher than the REIT sector's average of around 4.4% and the S&P 500's roughly 1.1% dividend yield. As a result, I can generate more passive income per dollar invested in the REIT than with many other alternatives.
That high-yielding payout is on rock-solid ground. NNN REIT currently has a dividend payout ratio of around 70% of its adjusted funds from operations (FFO). That's lower than many other net lease REITs, as Realty Income (O 0.62%), for example, has a payout ratio of nearly 75% of its adjusted FFO.
Meanwhile, the company has a strong balance sheet. It has BBB+/Baa1 bond ratings. That's one level below Realty Income (A3/A-), which has one of the 10 best credit ratings in the REIT sector. NNN REIT also boasts a sector-leading weighted-average debt maturity of 10.7 years, no encumbered assets, no floating-rate debt, and $1.4 billion in total liquidity. That gives it tremendous financial flexibility.
NNN REIT uses its flexibility to invest in new income-generating retail properties. It was on track to invest $850 million to $950 million last year, which it aimed to partially finance by recycling capital from $170 million to $200 million in property sales. It typically buys properties through existing tenant relationships via sale-leaseback transactions (72% of its investment volume since 2010 has come through these relationships).
The company aims to grow its earnings per share by around a mid-single-digit annual rate, supported by rental increases and new investments. That enables the REIT to steadily increase its dividend. It raised its payout by 3.4% last year, extending its growth streak to 36 years in a row. That's longer than Realty Income, which has raised its payout for over 30 straight years. NNN REIT should have no shortage of future investment opportunities to support its growing dividend. Realty Income estimates that the U.S. freestanding retail sector represents a $2.6 trillion market opportunity.
A top-notch passive income stock
NNN REIT offers a high-yielding payout built on a rock-solid foundation. It also has a magnificent track record of increasing its dividend, which seems likely to continue. I think it's a good addition to my passive income portfolio (which also includes a sizable investment in Realty Income). It can provide me with another bankable and steadily rising stream of passive dividend income to support my quest for financial freedom.
