The Best Real Estate Stock for a Lifetime of Passive Income

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

And in the context of maintaining an adequate emergency fund to protect yourself from resorting to high-interest debt to cover unexpected expenses, it isn’t wrong.

But these are unusual times, considering that the S&P 500 index is in a correction and inflation is at a 40-year high. That’s why it could be argued that excess cash is trash in this environment. The real estate investment trust (REIT) Realty Income (O -1.46%) looks to be a great stock to help income investors generate high income and grow their purchasing power over their lifetime. Let’s dig into why.

A lucrative business model with a lengthy growth runway

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

Realty Income’s tenants also cut a monthly check for base rent, which handily covers the company’s overhead costs for its operations. That’s why much of Realty Income’s rent revenue is converted into adjusted funds from operations (AFFO), which is similar to net income for a typical corporation.

Realty Income’s business has grown to over 11,100 properties located throughout the U.S., Puerto Rico, the United Kingdom, and Spain because it allows its tenants to unlock the value of their real estate. The appeal to businesses is that selling and leasing their properties back gives them the capital to pay down debt and/or invest in expansion that they may not have otherwise.

In exchange for the convenience of Realty Income’s services, tenants agree to lease terms of approximately one decade in duration. And if a predictable stream of rent revenue wasn’t enough, Realty Income also receives annual increases in its contractual rent revenue that are fixed at 2%-plus in the U.S. and linked to inflation in Europe. 

Along with the company’s track record of strong acquisition activity, this explains how Realty Income has delivered 5.1% annual median AFFO per share growth since 1995. Best of all, the company’s AFFO per share growth potential likely won’t slow down anytime soon. That’s because Realty Income’s real estate portfolio is a fraction of a percent of the combined $12 trillion commercial real estate market in the U.S. and Europe. 

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Image source: Getty Images.

Moderate dividend growth can continue

Realty Income’s above-average growth prospects for a REIT should translate to impressive dividend growth as well. This is why I believe, going forward, the stock can improve on its reputation of 4.4% annual dividend growth since 1994.

Assuming that Realty Income pays 5% more dividends in 2022 than in 2021, the stock’s dividend payout ratio would be just 76.2%. This leaves Realty Income with the capital necessary to fund future acquisitions to keep AFFO per share moving higher.

It doesn’t really get any better than a Dividend Aristocrat that yields 4.3% with mid-single-digit annual dividend growth potential. That’s precisely why I intend to own Realty Income well into retirement

The stock is fairly priced

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

Based on its guidance for 2022, Realty Income’s price-to-forward-AFFO-per-share ratio is 17.6 at the current $69 share price. This 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 seeking many more years of steadily growing passive income. 

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