The old saying that it takes money to make money is true, at least when it comes to generating passive income. You need to make up-front investments, and those will eventually start throwing off income.
On the plus side, it can be easy to get started. For example, anyone can open a brokerage account and buy dividend-paying stocks. One great option today for income-seeking investors is W.P. Carey (NYSE: WPC). That real estate investment trust (REIT) offers a dividend yield of around 5.5% at its current share price — significantly higher than the S&P 500’s sub-1.5% dividend yield. Here’s a look at why this REIT is ideal for generating passive income.
Built to generate steady rental income and dividends
W.P. Carey is one of the largest net lease REITs. That lease structure requires tenants to cover all of a property’s operating costs, including routine maintenance, building insurance, and real estate taxes. The REIT typically signs long-term net leases that have built-in rent hikes each year at either fixed rates or rates tied to inflation.
The company owns a portfolio of nearly 1,300 high-quality, operationally critical warehouse, industrial, and retail properties leased to credit-worthy tenants. It also owns 89 operating self-storage properties. The company’s real estate spans North America and Europe. This combination of diversification, lease structure, and quality enables the REIT to generate stable rental income that grows at a low single-digit annual rate (2.9% annualized in the second quarter).
W.P. Carey’s stable portfolio provides it with a lot of visibility about its future results. The company expects to generate between $4.63 and $4.73 per share of adjusted funds from operations (FFO) this year. That’s more than enough to cover its dividend payment ($0.87 per share each quarter or $3.48 per share annually).
Built to grow (its portfolio and payout)
W.P. Carey’s reasonable dividend payout ratio (less than 75% of its adjusted FFO) gives it lots of breathing room and financial flexibility. It allows the REIT to retain a meaningful percentage of its cash flow to help fund new investments.
It also maintains a solid investment-grade balance sheet, giving it additional financial flexibility to fund new investments. Its leverage ratio was 5.4 times at the end of the second quarter, putting it below its target ratio in the mid-to-high 5s.
These factors help support management’s view that it can continue growing its portfolio and dividend. The REIT currently expects to invest $1.25 billion and $1.75 billion in new properties this year. It had secured $641 million in new investments by the end of July. Notable among them were $148 million to close the second phase of a 14-property sale-leaseback transaction for industrial properties in Europe and a $190 million acquisition of a portfolio of 19 industrial properties across the U.S. and Canada. In addition to acquiring properties, W.P. Carey funds redevelopment, development, and expansion projects. It has $38 million of active capital investments and commitments scheduled for completion this year.
Property investments and rent hikes should drive steady growth in the REIT’s adjusted FFO per share. That should enable it to continue increasing its dividend. It has raised its payout twice already this year following a reset last fall after its strategic decision to exit the office sector. The company expects to increase its payout in line with its adjusted FFO in the future.
A great option for passive income
W.P. Carey owns a durable real estate portfolio that produces steadily rising rental income. That enables the REIT to pay an attractive dividend that should grow as it expands its portfolio. These features make it a great stock to buy for those who want to generate passive income.
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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.
Want to Make Some More Money? This 5.5%-Yielding Dividend Stock Could Provide You With Lots Of Passive Income. was originally published by The Motley Fool
