Investing in real estate can be a great way to generate passive income. The best way for beginners is to invest in real estate investment trusts (REITs). These entities own a portfolio of income-producing commercial real estate, giving them the cash flow to pay dividends to their investors.
It doesn’t take a lot of money to invest in REITs. Those with $1,000 or less to spare could invest that money into one or more REITs and build a diversified real estate portfolio. Three exceptional options to consider buying this month are Community Healthcare Trust (CHCT 1.08%), Realty Income (O 1.55%), and W. P. Carey (WPC 0.45%).
A very healthy payout
Community Healthcare Trust’s dividend currently yields 5%. A $1,000 investment could generate about $50 of annual passive income at that rate. For perspective, $1,000 invested in an S&P 500 index fund would only produce about $17 of annual dividend income, given its 1.7% dividend yield.
The healthcare REIT has done an exceptional job growing its dividend over the years. It has increased its payout every quarter since its initial public offering (IPO) in 2015.
The REIT should be able to continue growing its payout in the future. It has a conservative financial profile, including a relatively low dividend payout ratio for a REIT (71% of its adjusted FFO in the fourth quarter) and a low leverage ratio. Those features give it the financial flexibility to continue acquiring income-producing healthcare real estate.
Living up to its name
Realty Income is a magnificent passive-income stock. It pays a monthly dividend that currently offers a 4.9% yield. It has increased its payment 120 times since its public market listing in 1994, including twice already this year.
The company supports its dividend with a large-scale net lease real estate portfolio. The bulk of its portfolio is retail-related properties (primarily leased to companies resistant to disruption from e-commerce and a recession, like grocery, convenience, and drug stores). However, it has been diversifying into other sectors and geographies over the years, including industrial, gaming, and agricultural, while also expanding into Europe.
The REIT should keep growing its dividend in the future. Realty Income has one of the strongest financial profiles in the REIT sector, giving it ample flexibility to continue acquiring income-producing properties. It has A-rated credit and a conservative dividend payout ratio of around 75% of its adjusted FFO. Meanwhile, there’s a massive $13 trillion net lease real estate market. That gives it a large runway to continue growing.
Inflation-driving dividend growth
W. P. Carey’s dividend currently yields 5.5%. The diversified REIT has an excellent track record of growth, having increased its payout every year since its public market listing in 1998.
The REIT has a diversified portfolio by property type, tenant, geography, and industry. It focuses on owning operationally critical industrial, warehouse, office, retail, and self-storage properties net leased to high-quality tenants. A key aspect of its strategy is investing in properties with leases featuring annual rental rate escalation clauses tied to the inflation rate, enabling it to benefit from inflation.
W. P. Carey has a strong financial profile, including investment-grade rated credit and a reasonable dividend payout ratio. That gives it the financial flexibility to continue growing its portfolio. W. P. Carey’s steadily expanding portfolio and rising rents should enable the REIT to continue increasing its dividend.
Excellent income producers
Community Healthcare, Realty Income, and W. P. Carey are great options for those seeking to start collecting passive income this April. The REITs all pay above-average yielding dividends that they’ve consistently grown. With more dividend growth ahead, they can turn $1,000 into an attractive and steadily rising income stream.
Matthew DiLallo has positions in Realty Income and W. P. Carey. The Motley Fool recommends Community Healthcare Trust, Realty Income, and W. P. Carey. The Motley Fool has a disclosure policy.
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