The Best Real Estate Stock for a Passive Income Life

It is often said in the investment community that cash is king.

And as part of maintaining an adequate emergency fund to protect you from resorting to high-interest debt to cover unexpected expenses, that’s not wrong.

But these are unusual times, given that the S&P500 the index is in correction and inflation is at its highest for 40 years. That’s why you could say that excess cash is garbage in this environment. Real Estate Investment Trust (REIT) Real estate income (O -1.46%) seems like a great stock to help investors generate high income and increase their lifetime purchasing power. Let’s see why.

A lucrative business model with a long growth track

Realty Income is a triple net lease REIT. This means that its tenants pay all the expenses associated with their rented property.

Realty Income tenants also cut a monthly check for base rent, which easily covers the company’s overhead for its operations. That’s why a large portion of Realty Income’s rental income is converted into Adjusted Funds From Operations (AFFO), which is similar to the net income of a typical corporation.

Realty Income’s business has expanded to more than 11,100 properties located in the United States, Puerto Rico, United Kingdom and Spain as it enables its tenants to unlock the value of their real estate. The attraction for businesses is that selling and renting their properties gives them the capital to pay down debt and/or invest in expansion that they might not otherwise have.

In exchange for the convenience of Realty Income’s services, tenants agree to lease terms lasting about a decade. And if a predictable stream of rental income wasn’t enough, Realty Income also receives annual increases to its contractual rental income which is pegged at over 2% in the US and linked to inflation in Europe.

Along with the company’s history of strong acquisition activity, this explains how Realty Income has recorded a median annual growth in AFFO per share of 5.1% since 1995. Even better, the company’s potential for growth in AFFO per share probably won’t be slowing down any time soon. Indeed, Realty Income’s real estate portfolio represents a fraction of one percent of the combined $12 trillion commercial real estate market in the United States and Europe.

Image source: Getty Images.

Moderate dividend growth can continue

Realty Income’s above-average growth outlook for a REIT should also translate into impressive dividend growth. That’s why I think that in the future, the stock can improve on its reputation for annual dividend growth of 4.4% since 1994.

Assuming Realty Income pays 5% more dividends in 2022 than in 2021, the stock payout rate would be only 76.2%. This leaves Realty Income with the capital to fund future acquisitions to keep the AFFO per share up.

There’s nothing better than a Dividend Aristocrat yielding 4.3% with the potential for mid-single-digit annual dividend growth. This is precisely why I intend to own Realty Income until I retire.

Stock is reasonably priced

Despite Realty Income’s status as one of the best all-round REITs, the stock is modestly valued.

Based on its forecast for 2022, Realty Income’s price-to-AFFO ratio per share is 17.6 at the current share price of $69. That comes in slightly below the forward P/E ratio of 17.7 for the S&P 500.

And Realty Income’s trailing 12-month dividend yield of 4.3% is just below the stock’s 10-year median yield of 4.6%. This makes Realty Income a buy for income investors looking for many more years of steadily growing passive income.

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