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The Best Real Estate Dividend Stock for a Lifetime of Passive Income – The Motley Fool

Congress created real estate investment trusts (REITs) in the 1960s to allow anyone to invest in income-producing commercial real estate. REITs must pay dividends to maintain their tax advantages, which is why most are great for those seeking passive income.

However, one REIT stands out above all the rest for its ability to produce durable passive income: Realty Income (O -0.11%). Here’s a closer look at why it’s the best way to collect long-lasting passive income from real estate.  

An incredible dividend track record

Realty Income recently declared its 626th consecutive monthly dividend. That’s remarkable durability considering that there have been a few challenging real estate markets over the years. It’s also worth pointing out that Realty Income is one of the few companies paying a monthly dividend, making it ideal for those seeking to collect passive income. 

The REIT takes things up another notch by consistently increasing its dividend payment. It has given its investors 116 raises since its public listing, including in each of the last 99 straight quarters. Overall, Realty Income increased its dividend for more than 25 consecutive years, qualifying it as a Dividend Aristocrat. It’s one of 65 companies earning that distinction, including one of only three REITs. Realty Income has delivered 4.4% annual dividend growth since 1994.

The foundation to continue growing

Realty Income should be able to continue increasing its dividend in the future. A big driver is its durable real estate portfolio. The REIT owns nearly 11,500 freestanding commercial real estate properties leased to roughly 1,125 tenants across 72 industries in the U.S. and Europe. About 94% of its rental income comes from tenants in industries resilient to economic downturns and isolated from e-commerce pressures. Its top tenants include grocery stores, convenience stores, restaurants, pharmacies, and industrial companies.

The company utilizes triple net leases, which make the tenant responsible for variable expenses like maintenance, building insurance, and real estate taxes. These leases typically feature fixed or inflation-linked annual rate increases. Meanwhile, it focuses on leasing to financially stable tenants, with 43% of its rent coming from those with investment-grade credit ratings. These features provide Realty Income with very stable rental income that should steadily rise over time.

The REIT pays out a conservative amount of its income to shareholders via its dividend (roughly 75% of its adjusted funds from operations). That provides a nice cushion for the dividend while enabling it to retain cash to reinvest in acquiring more income-producing real estate. Realty Income also has a low leverage ratio and features A-rated credit, giving it one of the strongest balance sheets in the REIT sector. It can borrow money at lower costs and better terms than other REITs, giving it more flexibility to make acquisitions.

Realty Income sees an enormous opportunity to continue expanding its real estate portfolio in the future. It estimates that there’s about $12 trillion of owner-occupied real estate in its core global markets, giving it a massive total addressable market. The REIT expects to make over $6 billion of acquisitions this year, which will help grow its rental income and ability to continue increasing the dividend. 

The REIT has also been enhancing and diversifying its portfolio to reduce risk. It has reduced its exposure to certain segments of the retail sector and exited the office market by spinning those properties off to create Orion Office REIT. Meanwhile, it has grown its industrial and warehouse portfolio and expanded into the gaming industry. In addition, Realty Income is expanding geographically, making its first acquisitions in continental Europe last year. It has also significantly enhanced its scale by making needle-moving mergers, most recently closing its VEREIT transaction last year. These moves have further improved the long-term sustainability of Realty Income’s rental income and dividend. 

Built to produce lasting passive income

Realty Income has supplied its investors with a steadily rising passive income stream for decades. The REIT should be able to continue producing passive income in the years ahead, thanks to its increasingly durable portfolio and top-tier financial profile. That makes it stand out as the best real estate stock for those seeking passive income that can stand the test of time.



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