Want $1,000 in Passive Income? Buy 337 Shares in This Dividend Stock

Motley Fool ^ | June 18, 2022 | Reuben Gregg Brewer

[American Number 181269513]

Shifting from building a nest egg to building your passive income is something you are probably thinking about if you are near or already in retirement. It's a great strategy for making ends meet as you look to supplement your Social Security checks. One name that you might want to consider adding to your portfolio is Realty Income (O 1.00%).

When it comes to money, it's just easier to work with round numbers like $1,000. This way, you can simply scale up (or, less likely, down) to hit the dollar figure you have in mind. On June 14, Realty Income increased its annual dividend to $2.97 per share. So, to create $1,000 in annual passive income you would need roughly 337 shares at a cost of about $21,700 of this industry-leading real estate investment trust (REIT).

You can easily get to $1,000 in dividend income with plenty of other stocks, but there are a couple of things that set Realty Income apart from the pack. For starters, most companies with dividends pay quarterly, while Realty Income pays monthly. In fact, it has trademarked the name "The Monthly Dividend Company."

Receiving a monthly dividend check makes budgeting much easier than trying to spread a quarterly check out over three months. It sounds silly, but don't underestimate how comforting it is to know that in roughly 30 days, or less, you'll see another dividend check hit your account.

But there's more to "The Monthly Dividend Company" than just the frequency of the payment. Realty Income is also a Dividend Aristocrat, with an impressive 27 consecutive years of annual dividend increases, including a string of nearly 100 quarterly hikes. So not only are you getting a monthly paycheck, but you are getting reliable annual raises, too.

Those increases, meanwhile, have averaged about 4.4%, which sounds low today in the face of rampant inflation. But historically, inflation has averaged closer to 3%.

Still, some numbers will help. Realty Income estimates that if you had purchased the stock on the last day of 2011, your yield would have been around 5%. Thanks to regular dividend hikes, however, your yield on a purchase at the end of March 2022 would have been 8.5%. That's the power of slow and steady dividend increases.

With a roughly $39 billion market cap, Realty Income is the largest net lease REIT you can buy. Net lease means that the REIT owns single-tenant properties for which the lessees are responsible for most property-level operating costs. Across a large-enough portfolio, this is a very low-risk way to invest. Realty Income owns over 11,000 properties.

The bulk of its portfolio (78% of rents) is in the retail sector, where the buildings are fairly interchangeable and relatively easy to release or sell if there's a vacancy. The rest of the company's assets are largely industrial/warehouse, though there is a small "other" grouping that accounts for about 6% of rents (this comprises vineyards and a recently added casino). Meanwhile, about 10% of the company's rent comes from Europe, another fairly recent portfolio shift that opens up a new avenue for long-term growth.

This portfolio rests upon an investment-grade-rated balance sheet, so Realty Income has access to relatively cheap debt capital. And, given its impressive dividend history and position as a bellwether net lease REIT, it is usually afforded a premium stock price. Thus, it also tends to have ample access to cheap equity capital, too. This lower cost of capital gives Realty Income an edge when it comes to finding and sealing new property deals.

Realty Income's current dividend yield is around 4.6%. Relative to the broader market, that's a pretty generous number. To be sure, there are other net lease REITs with higher yields. But none of them can boast the combination of benefits that exist here and, for many investors, paying a premium price to get on board this passive income stream is likely to end up a worthwhile decision over the long term.

[TexasGator]

“The PE Ratio is a staggering 65.86.”

PE ratio is not a valid benchmark for REITS. More appropriate is FFO.

[TexasGator]

“You have been warned—if it crashes as interest rates rise...”

My dividends keep increasing and I have 28 years left on my 3% fixed mortgage.

That sets me till I reach 103.

[Vermont Lt]

Just to clarify…I never suggested they were not taxable. I just said they weren’t capital gains.

[TexasGator]

“Just to clarify…I never suggested they were not taxable. I just said they weren’t capital gains.”

REIT dividends have several classifications:

Ordinary dividends from income related to rents and interest

Capital gain dividends due to profit from sales

Return of Capital which is not taxed but modifies cost basis