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You’ve undoubtedly heard the old saying: “It takes money to make money.” While there are some ways to generate income without investing money, those either take a lot of time or require taking on more risk. The more conventional method is to use the money earned through an activity (your job or side hustle) and invest it to generate passive income.
A tried-and-true way of turning your active earnings into a growing stream of passive income is by investing it in real estate. One of the lower-risk real estate investments is properties backed by net leases, which make the tenant responsible for the rising costs of maintenance, building insurance, and real estate taxes. The leases feature annual rental-rate escalation causes, usually linked to inflation, so they supply steadily rising rental income.
The easiest way to invest in net lease real estate is through a real estate investment trust (REIT). Here are a few net lease REITs to consider, each with a history of steadily increasing their dividend payments.
Getty Realty (GTY -2.29%) is a publicly traded net lease REIT focused on owning properties where consumers spend money on or in their cars. The company’s portfolio includes convenience stores with gas stations, car washes, auto parts stores, service centers, and drive-thru properties. It has over 1,000 properties leased to operating tenants. The rental income from these properties supports Getty’s current dividend, which currently yields 5.5%. Put another way, every $1,000 invested in Getty Realty right now would generate about $55 of annual passive income.
Nearly all the company’s leases feature rent escalation clauses; some rise at a fixed rate each year, while others rise every three or five years at either a fixed rate or one linked to inflation. Overall, the company’s rental income should increase by 1.6% annually.
In addition to the steady rent growth of its existing properties, Getty Realty will build and buy income-producing real estate with similar features. It has invested $59.3 million across 19 properties through the first half of this year, and committed to deploying over $125 million in the next 12 months.
This combination of growth drivers has enabled Getty Realty to grow its adjusted funds from operations by 5.6% per share since 2015. That has supported compound annual dividend growth of 5.4% during that time frame. With a solid financial profile, Getty has the flexibility to continue growing its portfolio; along with rental escalations, that should enable it to keep increasing its dividend.
Four Corners Property Trust (FCPT -0.39%) is one of the largest owners of restaurants and retail real estate. The company has nearly 1,000 properties secured by net and ground leases, which supply steadily rising rental income. It leases these properties to high-quality operators, including Darden Restaurants (DRI -2.44%) and Brinker International.
In addition to restaurants, Four Corners owns auto service locations (auto service centers, auto parts stores, and gas stations with large convenience stores) and medical retail locations (urgent care, dental clinics, dialysis centers, and veterinary care). The rental income from these properties supports its dividend, which is yielding nearly 5%.
Four Corners has steadily increased its dividends since its spinoff from Darden in 2016. The company most recently gave investors a 4.7% raise, boosting the dividend payment to $0.3325 per share each quarter. That’s 37.1% above its dividend payment in its first full quarter following the spinout.
What’s driving the REIT’s growth: rising rental rates on its leases, and its ability to steadily expand and diversify its portfolio by making acquisitions. With a strong financial profile, Four Corners should be able to continue growing its portfolio and dividend.
W.P. Carey (WPC -0.91%) is one of the largest net lease REITs in the world. It owns a diversified portfolio with properties spanning the warehouse, industrial, office, retail, and self-storage sectors. It net-leases these properties to operators under long-term contracts with built-in rent escalators. Those contracts help support its dividend, now yielding more than 5%.
W.P. Carey has an excellent track record of growing that payout. The REIT has given its investors a raise every single year since its initial public offering in 1998.
The diversified REIT should be able to continue growing its payout in the future. Its legacy portfolio will keep supplying steadily rising rental income driven by lease escalations. Meanwhile, the company expects to be able to continue acquiring income-producing net lease real estate, aiming to buy $1.75 billion to $2.25 billion worth of properties this year.
Getty Realty, Four Corners, and W.P. Carey are three of the many REITs focused on owning net lease real estate. Those leases supply them with steadily rising rental income. Also, most net lease REITs steadily expand their portfolios by building and buying additional properties. Those two growth drivers enable most to steadily increase their dividends. That makes them great options for those seeking to turn actively earned income into a growing passive income stream.
Matthew DiLallo has positions in W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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