This REIT can produce lots of passive income.
Investing in real estate can be an excellent way to start generating passive income. There are lots of paths to potentially make passive income from real estate. One of the easiest to take is investing in a real estate investment trust (REIT).
W.P. Carey (WPC 1.33%) is a top REIT for those seeking a lucrative passive income stream. The diversified REIT currently has a dividend yield approaching 6%. At that rate, every $1,000 invested into its stock would produce nearly $60 of annual passive dividend income. Here’s why W.P. Carey is an ideal option for those seeking to start collecting passive income.
Built on a strong foundation
W.P. Carey is one of the largest REITs focused on net lease real estate. That lease structure requires the tenant to cover a property’s operating expenses, like routine maintenance, building insurance, and real estate taxes. As a result, the landlord collects a very stable stream of rental income.
W.P. Carey has a well-diversified portfolio of high-quality, operationally critical properties. It currently owns nearly 1,300 single-tenant industrial, warehouse, and retail properties across the U.S. and Europe, leased to 346 tenants in various industries. The REIT also has 89 operated self-storage facilities.
More than half of its leases, 53%, link rents to inflation. Meanwhile, most of its remaining leases, 44%, escalate rent at a fixed rate each year. These clauses drive its annual base rental rates higher each year, and rents grew by a 2.9% annualized rate in the second quarter.
The company’s stable and steadily rising rental income enables it to pay an attractive and growing dividend. It targets to pay 70% to 75% of its cash flow in dividends each year. That gives it a decent cushion while enabling the REIT to retain some cash to help fund new investments.
The REIT also has a strong investment-grade balance sheet with a low leverage ratio. At 5.4 times at the end of the second quarter, leverage was below its target range in the mid-to-high 5s. That strong balance sheet gives it more financial flexibility to invest in expanding its portfolio.
Rebuilt and returning to growth
W.P. Carey has spent the past year enhancing its portfolio. It made the strategic decision to exit the troubled office sector last fall by selling or spinning off its office properties. Those sales reduced a drag on its growth and enhanced its financial flexibility. The REIT also sold a portfolio of net leased self-storage properties back to the operator and some other noncore properties to further strengthen its foundation.
The company’s portfolio reshuffle has caused a near-term earnings decline, which led the REIT to reset its dividend to a lower level. However, it has started to rebuild its portfolio by acquiring higher-quality properties. It closed $641 million of new investments by the end of July, including buying a portfolio of 19 industrial facilities, a newly built three-property distribution center, and two fitness facilities. These deals have the REIT on pace to complete $1.25 billion-$1.75 billion of new property investments this year.
W.P. Carey’s rebuilt portfolio has enabled it to start growing its dividend again. It has raised its payout twice this year by 1.2% in total. Meanwhile, it expects its cash flow per share to return to a growth trajectory in the second half of this year. Given its strong financial profile, W.P. Carey should be able to continue expanding its portfolio. That positions the REIT to steadily increase its dividend in the future.
Built to produce passive income
W.P. Carey focuses on investing in properties that produce durable and steadily rising rental income. The REIT has taken steps to further fortify its portfolio and financial profile so that it can continue investing in new income-producing properties. That should enable the REIT to steadily increase its high-yielding dividend. Given its high yield and growth prospects, it’s an excellent option for those seeking a sustainable and growing passive income stream.
Matt DiLallo has positions in W.P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
