3 Dividend Stocks for Passive Income From Real Estate
These REITs have broad appeal for income investors looking for a mix of current yield and dividend growth.
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Income investors looking for passive income should take a closer look at real estate investment trusts, or “REITs.”
REITs provide the opportunity to invest in real estate without the hassle of owning physical property. In addition, REITs usually have high dividend yields, which make them appealing for income investors.
These three REITs have broad appeal for income investors looking for a mix of current yield and dividend growth.
Realty Income
Realty Income O is a retail real estate-focused REIT that has become famous for its successful dividend growth history and monthly dividend payments. Today, the trust owns thousands of properties. It owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This means that the properties are viable for many different tenants, including government services, healthcare services, and entertainment.
The trust's third-quarter 2024 EPS at $0.30, missed estimates by $0.06, but revenue of $1.27 billion, a 26% year-over-year increase, beat expectations by $10.01 million. Net income for common shareholders was $261.8 million. The company generated $915.6 million in Adjusted Funds from Operations (AFFO), or $1.05 per share. Realty Income invested $740.1 million in new properties, achieving an initial average cash yield of 7.4%, while maintaining a portfolio occupancy of 98.7%.
The growth that this REIT is experiencing has been very steady, coming almost every year at a mid-single-digits CAGR. As a result, the trust has been able to grow its AFFO per share and its dividend per share for many years and is today a Dividend Aristocrat.
Realty Income generates its growth through growing rents at existing locations, via contracted rent increases or by leasing properties to new tenants at higher rates, but also by acquiring new properties. It expects to increase its investments in international markets moving forward. It made a first deal in the U.K. in 2019 and plans to do more such deals in the future when it finds attractive targets. These acquisitions will help drive profits in the long run.
In addition, Realty Income’s properties are relatively "Amazon-proof," as the REIT owns standalone properties that can be used as cinemas, fitness centers, pharmacies, dollar stores, etc. These properties are in demand and will likely remain so.
Realty Income has increased its dividend for 27 consecutive years and currently yields 6%.
Digital Realty
Digital Realty Trust's DLR properties are a combination of data centers that store and process information, technology manufacturing sites and Internet gateway datacenters which allow major metro areas to transmit data. The company operates over 300 facilities in more than 25 countries on six continents and has a market capitalization of $58 billion.
On October 24, Digital Realty reported third-quarter 2024 results for the period ended September 30, 2024. For the quarter, Digital Realty’s revenue rose 2% year-over-year to $1.4 billion. The company generated $1.67 in core FFO per share compared to $1.62 per share in the prior-year period.
DLR’s future growth outlook is very promising due to the consistent rise in demand for data centers. Digital Realty has added to its growth with acquisitions. For example, in 2017, Digital Realty completed its purchase of DuPont Fabros Technology, a REIT that leased properties to some of the largest tech companies in the world. Companies like Microsoft MSFT and Meta META are then free to build their own data centers within the properties.
More recently, Digital Realty added Interxion, gaining exposure to the European cloud industry. And as of late, Digital Realty has been developing multiple joint ventures with partners like GI Partners, Blackstone, and TPG Real Estate.
Digital Realty’s chief competitive advantage is that it is among the largest technology REITs in the world. This gives the REIT a size and scale advantage that competitors have difficulty matching. In addition, the company has proven to be able to utilize its balance sheet to fund acquisitions in order to grow FFO and revenues.
DLR has increased its dividend for 17 consecutive years, and currently yields 2.8%.
STAG Industrial
STAG Industrial STAG is an owner and operator of industrial real estate. It is focused on single-tenant industrial properties and has 563 buildings across 41 states in the United States. The focus of this REIT on single-tenant properties might create higher risk compared to multi-tenant properties, as the former are either fully occupied or completely vacant.
STAG Industrial executes a deep quantitative and qualitative analysis on its tenants. As a result, it has incurred credit losses that have been less than 0.1% of its revenues since its IPO. As per the latest data, 53% of the tenants are publicly rated and 31% of the tenants are rated “investment grade.” The company typically does business with established tenants to reduce risk.
In late October, STAG Industrial reported financial results for the third quarter of 2024. Core FFO per share grew 2% over the prior year’s quarter, from $0.59 to $0.60, in line with the analysts’ consensus, thanks to the sustained strength of the REIT’s tenants and hikes in rent rates. Net operating income grew 5% over the prior year’s quarter even though the occupancy rate remained flat at 97.1%. It also marginally raised its already positive guidance for core FFO per share in 2024, from $2.36-$2.40 to $2.38-$2.40.
STAG Industrial has grown its FFO per share at a 6.2% average annual rate over the last decade and at a 4.9% average annual rate over the last five years. The U.S. industrial market is more than $1 trillion in size and STAG Industrial still has a market share that is less than 1% of its target market, which includes the top 60 markets of the country. Therefore, the REIT has ample room to continue to grow for years.
STAG Industrial has a well-laddered lease maturity schedule, with a weighted average lease term of five years. Thus, the cash flows of the REIT can be considered fairly reliable under normal business conditions. STAG Industrial is one of the few REITs that pay dividends on a monthly (instead of a quarterly) basis – a valuable characteristic for income investors.
This REIT has increased its dividend for 13 consecutive years and currently yields 4.5%.
At the time of publication, Ciura had no positions in any stocks mentioned.