2022 was a brutal year for investors. The S&P 500 is rallying as 2023 nears, but the broader stock market is still down 10% since last year. While a lot of investors sat on the sidelines during the market's tremendous volatility, some used it as a buying opportunity.
Buying stocks when prices are low helps increase your return over time and allows you to earn higher yields from dividend-paying stocks. Three great passive income stocks these Motley Fool contributors bought in 2022 are Blackstone (BX -1.15%), Gladstone Commercial (GOOD 0.93%), and Digital Realty Trust (DLR -0.01%).
Here's a closer look at each company and why investors may want to consider adding these great income stocks to their portfolio before year-end.
A leading asset manager that pays a 6% yield
Liz Brumer-Smith (Blackstone): Blackstone is a premier alternative asset manager. The company owns several private real estate investment trusts (REITs), funds, and other equities across a diverse mix of assets like real estate and life sciences. It earns a fee for managing wealthy individuals' and investment firms' money. As of the third quarter of 2022, Blackstone has roughly $950 billion in assets under management (AUM), a 30% increase from last year.
This past year was explosive for the company as investors sought positive yields in a bear market. Its fee-related earnings, its primary source of income as a company, have grown by 200% for the nine months ended 2022. And I believe this momentum is something it will be able to maintain in the coming years as inflation continues to impact the economy. The more money it gets from investors, the more it earns.
The Federal Reserve has emphasized its hawkish stance on taming inflation, intending to raise the Federal Funds rate from 5% to 7% in 2023. Rising rates would impact the company's cost of borrowing. In response to this news, its shares plummeted just over 16% in one week.
But Blackstone is flush with money, having $18 billion in cash equivalents and only $9 billion in debt. The company uses debt to its advantage, helping it leverage certain investments. However, it's not necessarily the driving force for growth, making it less vulnerable to interest rates rising.
Today it pays a nearly 6% dividend yield, which is nearly 4 times the aggregate yield of the S&P 500. It's trading at a slightly higher than average price-to-earnings (P/E) ratio of 24 times, putting it at a slight premium to other asset management stocks. However, the company offers a much higher yield with a superior balance sheet.
Gladstone Commercial is yielding a lofty 8.1%
Marc Rapport (Gladstone Commercial): Gladstone Commercial is a mixed-use REIT that is responding to the times by changing its mix. This provider of an uninterrupted stream of monthly dividend payments for nearly two decades is actively shedding office space and buying industrial properties in what it calls its "capital recycling strategy."
From July through September 2022, the company bought five industrial properties and sold four office properties, and CEO and founder David Gladstonesaid that all 15 acquisitions it was pursuing were of the industrial variety to add to its mix of manufacturing and logistics sites.
The company says its current mix of nearly 140 sites in 27 states is now 54% industrial, 42% office, 3% retail, and 1% medical office. The portfolio is about 96% occupied, the company says, and rent collection has been 100% for the past four months.
Gladstone is at the helm of four publicly traded companies that are managed with passive income in mind, and Gladstone Commercial is particularly good at it. The company has never cut the dividend, even through the Great Recession, since it went public in 2003.
With a market cap of about $762 million, Gladstone Commercial is not a large REIT, but its payback has been. Total return since its initial public offering is close to that of the S&P 500 and the current yield is about 8.1%, nearly 5 times that of the big benchmark. I bought shares of Gladstone Commercial this year and I plan to next year. For an active flow of monthly cash from real estate, you can do far worse than GOOD.
Digital Realty Trust is seeking out future explosive growth today
Kristi Waterworth (Digital Realty Trust): I bought many passive income stocks in the last year -- nearly two dozen, in fact, in various amounts. But, of all the real estate investment trusts I picked up in 2022, one of my absolute favorites and one that I will keep forever is Digital Realty Trust. Not only does it provide a solid service to the world as a data center REIT, but it also has a track record of doing so in a financially responsible way that's keeping it looking toward the future, rather than simply leaning on past wins.
Although the stock itself is down over 38% from its high in December 2021, the dividends are up from last year because it's making even more money. Stock prices can only tell you so much; the more important part is where the business sees itself in five or 10 years. And with Digital Realty, that's expanding into underserved markets where digital services remain incredibly valuable assets.
For example, back in August, Digital Realty Trust acquired Teraco, a leading data center and interconnection provider in South Africa. This is not its first African acquisition, in fact it already owned data centers in Kenya, Mozambique, and Nigeria.
Of course, Digital Realty Trust isn't putting all its eggs in its African basket, but with four data centers on the continent, it certainly seems to be investing in an area with huge growth potential given the tools the businesses there need to expand onto the world stage more efficiently. U.S.-based data centers serve a purpose and certainly have a huge draw, but the growth potential is becoming increasingly limited to the rate of growth of the digital realm itself.
So what do you do if you want to run a thriving data center REIT?
You build a solid base in the U.S. that generates more than half your income and you start sending out feelers in other countries to find the needs and fill them. In the last year, Digital Realty Trust has been aggressively adding data centers outside of the country, and now generates over 40% of its income from these areas.
Data centers aren't sexy, and they're not exciting, but this is why I love this stock so much. In an industry that's basically as interesting as a brown paper bag, it continues to be bold and take calculated risks. It'll never be a growth stock, but it's an excellent long-term investment.
