I love collecting passive income. There’s just something about getting paid even though I didn’t work to earn that money. However, passive income brings more than joy. It gave me tremendous financial flexibility and set me on the path to financial freedom.
One of my favorite places to generate passive income invests in real estate investment trusts (REITs). The sector typically offers above-average income returns that increase steadily over time. A great REIT for beginners is Real estate income (NYSE:O).
What is real estate income?
Realty Income is a REIT that focuses on owning freestanding properties that it leases to a single tenant under a net lease OK. This lease structure makes the tenant responsible for maintenance, building insurance and property taxes. As a result, Realty Income earns stable rental income.
The REIT currently owns approximately 11,280 properties in the United States and Europe leased to approximately 1,090 clients in more than 70 sectors. It is primarily focused on owning properties leased to quality tenants in the retail and industrial sectors that are recession-proof and insulated from e-commerce pressures. These include grocery stores, pharmacies, home improvement stores, quick service restaurants and warehouses. This diversified portfolio helps reduce risk, further stabilizing Realty Income rental income.
Another key feature of Realty Income is its financial strength. He has a reasonable dividend distribution rate for a REIT at approximately 75% of its adjusted funds from operations (an approximation of cash flow). This allows him to keep about a quarter of his income to reinvest. Realty Income also has one of the highest credit ratings in the REIT industry. This gives her enormous financial flexibility as she can borrow money at lower rates.
An amazing passive income maker
Realty Income’s low-risk business model and conservative financial profile has enabled the company to provide reliable income to its shareholders over the years. The REIT has paid an impressive 623 in a row monthly dividends since its creation 53 years ago. Meanwhile, Realty Income has increased its dividend payout 115 times since going public in 1994, including growing it in each of the past 98 consecutive quarters. Overall, Realty Income expanded the payout at a compound annual rate of 4.4%.
This growing dividend has accumulated over time. For example, someone who bought 100 stocks ten years ago ($3,496 investment) would have received $174.60 in dividends in the first year, a 5% return on their original cost. Fast forward 10 years, and that same investment would generate $296.40 in annual income, good for an 8.5% return on the initial cost. Meanwhile, cumulative passive income over the past decade is now $2,707 or 77% of the initial investment.
More passive income growth to come
Realty Income should be able to continue to grow its dividend in the years to come. REIT estimates that there is over $12 trillion worth of owner-occupied commercial real estate in the United States and Europe. This leaves him with a large pool of income-generating property opportunities that he can purchase in the future to help increase his stream of rental income. He aims to buy at least $5 billion worth of properties this year alone.
In the meantime, the REIT has plenty of financial leeway to fund its continued expansion. It retains about a quarter of its rental income for reinvestment and has one of the best balance sheets in the industry to help fund growth. Realty Income will also sell stocks to fund transactions and maintain a strong balance sheet.
A great way to start earning passive income
Realty Income has one of the low-risk business models in the REIT industry, which helps improve revenue sustainability. Meanwhile, he has a phenomenal growth record that isn’t expected to end anytime soon. These characteristics make it an ideal investment for those looking to start earning passive income.
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Matthew DiLallo holds positions in real estate revenue. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.