Do you want to collect passive income? Here’s a great place to start.


I love collecting passive income. It just has something to do with getting paid, although I didn’t do any work to earn that money. However, passive income brings more than joy. It has given me tremendous financial flexibility and put me on the path to financial freedom.

One of my favorite places to generate passive income invests in Real Estate Investment Trusts (REITs). The sector typically offers above-average income yields that are steadily increasing over time. A great REIT for beginners is real estate income (NYSE:O).

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What is real estate income?

Realty Income is a REIT focused on owning detached properties which it leases to a single tenant under a net rent Approval. This lease structure makes the tenant responsible for maintenance, building insurance, and property taxes. As a result, Realty Income generates steady rental income.

The REIT currently owns approximately 11,280 properties in the United States and Europe that are leased to approximately 1,090 clients in more than 70 industries. It is primarily focused on owning properties leased to high-quality tenants in the retail and industrial sectors that are recession-resistant and insulated from the pressures of e-commerce. These include grocery stores, pharmacies, hardware stores, quick service restaurants, and department stores. This diversified portfolio helps mitigate risk and further stabilizes Realty Income’s rental income.

Another important feature of Realty Income is its financial strength. It has a reasonable payout ratio for a REIT at around 75% of its adjusted funds from operations (a proxy for cash flow). This allows her to keep about a quarter of her earnings for reinvestment. Realty Income also has one of the highest credit ratings in the REIT sector. This gives it tremendous financial flexibility as it can borrow money at lower interest rates.

An amazing passive income producer

Realty Income’s low-risk business model and conservative financial profile have enabled the company to deliver reliable income to its shareholders over the years. The REIT paid an impressive 623 outright monthly dividends since its inception 53 years ago. Meanwhile, Realty Income has increased its dividend payment 115 times since it went public in 1994, including an increase in each of the last 98 consecutive quarters. Overall, Realty Income has grown payments at a compound annual rate of 4.4%.

That growing dividend has added up over time. For example, someone who bought 100 shares a decade ago ($3,496 investment) would have received $174.60 in dividends that first year, or a 5% return on their original expense. If we fast-forward 10 years, the same investment would generate $296.40 in annual income, which is an 8.5% return on the initial cost. Meanwhile, the cumulative passive income over the past decade is now up to $2,707, or 77% of the original investment.

More passive income growth ahead

Realty Income should continue to grow its dividend for years to come. The REIT estimates that there is over $12 trillion in owner-occupied commercial real estate in the US and Europe. This leaves it with a wide range of income generating real estate opportunities to purchase in the future to increase its rental income. It aims to purchase at least $5 billion worth of real estate this year alone.

The REIT now has enough financial flexibility to fund its continued expansion. It retains about a quarter of its rental income for reinvestment purposes and has one of the best balance sheets in the industry to fund growth. Realty Income will also sell shares to fund transactions and maintain a strong balance sheet.

A great way to earn passive income

Realty Income has one of the lower-risk business models in the REIT sector, which helps improve earnings sustainability. It now has a phenomenal track record of growth that is unlikely to end anytime soon. These qualities make it an ideal investment for those looking to start earning passive income.

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Matthew DiLallo has positions in Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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