There are many ways to earn passive income. One of the easiest is to invest in dividend stocks.
There are many opportunities. Some of the favorites of our contributors who love passive income are SAVE capital (STURGEON -0.56%), real estate income (O -0.11%)and STAG Industry (DEER -1.20%). Because of this, they believe these stocks are surefire ways to generate a steady stream of passive income.
STORE Capital is less sensitive to the business cycle
Brent Nyitray (SAVE capital): STORE Capital is a real estate investment trust (REIT) focused on single tenant operated properties (the acronym for the company’s name), typically under the triple net lease arrangement. Most leases are gross leases, which require the landlord to pay for things like taxes, maintenance, and insurance, much like an apartment lease. The tenant is responsible for the rent and not much else. In the case of triple-net rental agreements, the tenant must bear these additional costs. These leases are generally long-term and include periodic increases based on an inflation index. Almost 77% of STORE Capital’s leases expire after 2031. Because these leases are longer-term, there is security on both the REIT and tenant side.
The typical tenant for STORE Capital is a restaurant, early childhood education center or gym. The company also has manufacturing and retail facilities. STORE Capital uses a rigorous methodology to find tenants and requires them to provide detailed financial projections that show they can not only make the rent payments but also grow the business and thrive. This business model has attracted legendary investor Warren Buffett, and STORE Capital is an equity stake in Berkshire Hathaway.
STORE Capital’s tenant base includes many defensive industries, which means consumers will buy from them even when the economy is in recession. Even in a recession, people need to fix their cars, watch their kids, and hit the gym. During the COVID-19 pandemic, STORE Capital was able to maintain its dividend when most REITs cut their dividends. At current levels, the stock has a dividend yield of 5.3%.
The name says it all
Matt DiLallo (real estate income): Realty Income built its business to provide its investors with reliable monthly payments Dividend Income. The REIT has declared 626 consecutive monthly dividend payments in its 53-year history of operation. Even better, it’s steadily increased its dividend over time. In total, it has granted investors 116 raises, including for the past 99 consecutive quarters, increasing its payout by 4.4% annually since it went public in 1994.
Several factors have helped Realty Income’s ability to pay a steadily increasing dividend. It all starts with the company’s resilient real estate portfolio. The REIT focuses on owning essential, detached properties that are leased on triple net leases (NNN) to companies in durable industries. Around 94% of rental income comes from tenants in sectors resilient to economic downturns or the threat of e-commerce. Meanwhile, NNN leases hold the tenant responsible for variable expenses like maintenance, building insurance, and property taxes. These characteristics allow Realty Income to generate very stable rental income.
The REIT pays out a conservative portion of its rental income (about 75% of its adjusted funds from operations) to shareholders through its monthly dividend. It now has one of the strongest A-rated balance sheets in the REIT sector. These factors give the company tremendous financial flexibility and enable it to steadily acquire more high-yield properties.
Add in Realty Income’s above-average dividend yield, which currently sits at around 4%, and it’s a no-brainer for investors looking for a steady source of passive income.
STAG Industrial continues to pump out passive income
Markus report (STAG Industry): STAG Industrial is an industrial REIT, a growing player in the formerly staid business of owning and leasing warehouse space. Not so set anymore.
E-commerce has made this one of the hottest sectors in commercial real estate, and STAG has not only rode it, it’s thriving. STAG has surpassed that S&P500 and Dow Jones US Industrial & Office REITs Index by 45% and 500% respectively since the IPO in 2011.
In its first decade, the Boston-based company has grown its inventory to approximately 111 million square feet of space in 559 buildings across 40 states, including the addition of nine buildings in the second quarter of 2022. STAG also reported an 18% year-over-year increase in Funds from operations (FFO) per share. It’s a key measure of how well the company is using its cash. The same report also said it has the liquidity to spend $1 billion on acquisitions by the end of the year, so expect more to come.
Of course we are talking about passive income here, and STAG delivers for that too. The REIT has increased its payout by an annualized 11% over the past three years and is now yielding about 4.2% with a current dividend of $0.121667 per month. That’s right, this is a monthly dividend payer, an added attraction for investors who like to be paid 12 times a year instead of just four.
E-commerce accounts for about 40% of STAG’s portfolio activity. In general, the company expects to benefit from both a recovery in retail inventories and growing demand for industrial space as companies open new US operations in a new “just-in-case” environment rather than the traditional “just-in” environment. Settle or found environment -time” manufacturing and distribution paradigm.
STAG stock took a hit as e-commerce concerns roiled the market, including for the REIT’s biggest tenant — Amazon accounts for about 3% of REIT rent. But the four analysts covering STAG all rate it a Buy and give it a consensus price target of $45.25, which would mean a 30% jump from current levels of around $35 per share.
I think it’s a good buy and hold. I own it now and intend to add stocks for both their growth potential and nice monthly income flow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brent Nyitray, CFA, has no position in any of the stocks mentioned. Marc Rapport has positions at Amazon, Realty Income, STORE Capital and Stag Industrial. Matthew DiLallo has positions in Amazon, Berkshire Hathaway (B shares), Realty Income and Stag Industrial. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway (B shares), STORE Capital, and Stag Industrial. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.