Real estate is a great spot to invest in for those seeking to generate income. Rental properties can provide predictable income as tenants make their rental payments.
There’s a myriad of ways to make passive income from real estate, including many excellent real estate investment trusts (REITs). The ultimate REIT for dividend income is Realty Income (O 0.45%). It has paid 656 consecutive monthly dividends and has increased its payment 129 times since coming public in 1994, including the last 110 quarters in a row. With a low share price in the mid-$50s, it’s the best stock for those with $200 available to invest right now to buy for a real estate-backed income stream.
A high-quality real estate portfolio
Realty Income owns a highly diversified commercial real estate portfolio. It holds more than 15,600 properties across all 50 states and seven European countries. Its portfolio spans retail, accounting for 79.4% of its rent; industrial, 14.5%; gaming, 3.2%; and other properties, 2.9%. It leases its properties to 1,565 clients in 89 industries, with 91% of its rent coming from tenants in sectors resilient to recessions and immune to the pressures of e-commerce.
Its clients include many of the world’s leading companies. Some of its top tenants are 7-Eleven, FedEx, and Wynn Resorts. Realty Income will partner with leading companies to help them meet their real estate financing needs, often by steadily acquiring properties from them in sale-leaseback transactions.
The REIT leases its properties to tenants under long-term net leases. That lease structure requires tenants to cover all operating expenses, including routine maintenance, real estate taxes, and building insurance. And that means net leases tend to provide very stable rental income to support dividend payments, even more so for Realty Income, considering the quality of its tenant base and the diversification of its property portfolio.
Built on a rock-solid financial foundation
Realty Income has a very conservative financial profile. Its dividend payout ratio was 74.6% of its adjusted funds from operations (FFO) last year. With its portfolio producing over $3.6 billion of adjusted FFO, it was able to retain about $900 million in cash to help fund new investments.
The company also has an elite balance sheet. It’s currently one of only eight REITs in the S&P 500 with two bond ratings of A3/A- or better. Realty Income’s high credit rating provides it with greater access to capital and better terms.
Plenty of growth ahead
Realty Income has grown into the world’s seventh-largest REIT with $58 billion of real estate across eight countries. However, it still has a very long growth runway.
It estimates that there’s $5.4 trillion of real estate suitable for the net lease structure in the U.S. across its current property verticals of freestanding retail, industrial, consumer-centric medical, data centers, and gaming. Meanwhile, Europe represents another $8.5 trillion total addressable market opportunity for net lease properties.
Realty Income has been steadily expanding its opportunity set by adding new property verticals, such as gaming and data center development. It’s also acquiring properties in additional European countries, having most recently entered France, Germany, and Portugal. And it’s launching new investment platforms related to credit and private capital management. The private capital management platform opens up an $18.8 trillion opportunity to manage capital for institutional investors. That strategy will provide it with management fee income and additional capital to invest in more income-generating properties.
The REIT has the financial capacity and opportunity set to invest billions of dollars into income-generating real estate each year. It invested $3.9 billion last year and acquired fellow REIT Spirit Realty in a $9.3 billion deal. Meanwhile, it initially anticipates spending about $4 billion on property acquisitions this year. These deals will help grow its adjusted FFO per share, enabling the REIT to continue increasing its high-yielding monthly dividend.
The ultimate real estate income stock
Realty Income pays a high-quality, high-yielding dividend. At its current yield of 5.7%, an investor can generate about $11.40 of dividend income each year on a $200 investment in the REIT. That income stream should grow as the REIT expands its high-quality real estate portfolio and increases its dividend. Its combination of portfolio quality, balance sheet strength, growth potential, and high yield make it the ultimate real estate stock to buy for income.
Matt DiLallo has positions in FedEx and Realty Income. The Motley Fool has positions in and recommends FedEx and Realty Income. The Motley Fool has a disclosure policy.
