I want to become financially independent. For me, that means I need to generate enough passive income to cover my recurring expenses. Investing in dividend stocks is a big part of my strategy. I focus on companies that pay above-average dividends that should grow steadily in the future.
Real estate income (NYSE:O) fits my strategy perfectly. The real estate investment trust (REIT) has done a phenomenal job of enlarging it monthly dividend over the years. The company recently achieved its 126th dividend increase since going public in 1994.
The REIT should do that have no trouble to increase the payout (which currently yields a well-above-average return of almost 6%) in the future. That’s why I buy more shares every chance I get.
Built to deliver a reliable, growing dividend
Realty Income has one of the better dividend-paying track records in the REIT sector. It has increased its payouts for 29 consecutive years (and an impressive 107 consecutive quarters). While the most recent increase was a modest 0.2% higher than last month’s level, the dividend is up 2.9% over the past year and has grown at a compound annual rate of 4.3% since listing in 1994.
a big The driving factor behind Realty Income’s ability to pay a reliable and growing dividend is its high-quality real estate portfolio. The REIT focuses on owning a diversified real estate portfolio net rented to high-quality tenants in sustainable industries. That leasing structure requires tenants to cover building insurance, property taxes and maintenance. They usually also have an annual rent increase clause. Realty Income’s existing real estate portfolio therefore provides highly predictable rental income that increases by more than 1% per year.
The company pays out less than 75% of its stable cash flow in dividends every year. That produces a nice cushion while you switch on it to withhold money to help finance new income-generating investments. The REIT has done that too a very strong one balance sheet, giving it extra financial flexibility.
Realty Income estimates it can fund enough new investments internally to grow cash flow per share by 2% to 3% annually. Add in rental growth and subtract the impact of higher interest rates and uncollectible rent, and the REIT should be able to grow its cash flow per share internally at more than 2% per year. This provides a solid basis for future dividend increases.
Plenty of additional growth potential
Real estate income can grow faster than 2% per year. The goal is to derive 4% to 5% of adjusted resources from operations (FFO) growth per share per year. That corresponds to the historical growth rate of about 5% per year.
The REIT can achieve this incremental growth by making acquisitions financed with external capital (issuing new shares and debt). The company estimates it can increase its adjusted FFO per share by 0.5% per year for every $1 billion in acquisitions financed with external capital. That suggests the company needs to make $4 billion to $6 billion in acquisitions every year to achieve annual FFO growth of 4% to 5% per share. That’s certainly feasible, considering the company has made at least $9 billion in acquisitions each of in recent years (including the completion of its $9.3 billion acquisition of fellow REIT Spirit Realty earlier this year).
Real estate income should have no shortage of investment opportunities. It estimates that the net rental real estate addressable market is $5.4 trillion in the US and $8.5 trillion in Europe. The total addressable market opportunity has increased as the company expanded into new real estate verticals.
For example, Realty Income has added gaming, data centers, new European countries and credit investments to its portfolio in the past a few years. Add in corporate mergers as it continues to consolidate the net lease REIT sector, and real estate revenues have a very long growth trajectory ahead.
Income and benefit
Realty Income pays a high-yield monthly dividend that should continue to grow as it acquires additional income-producing properties. Add the income stream (about 6% per year) to the growth rate (4% to 5% per year) and the REIT should be able to generate double-digit annualized total returns over the long term. That attractive combination of income and upside is why I continue to buy more stocks whenever I can.
Should you invest €1,000 in real estate income now?
Consider the following before purchasing shares in Realty Income:
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Matt DiLallo has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Why I’ll Keep Buying More of This Phenomenal High-Yield Dividend Stock Every Chance I Get was originally published by The Motley Fool
