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The Secret to Passive Income Is Hiding in This Unstoppable Dividend Stock

It's no secret that investing in real estate can be a great way to generate passive income. However, many investors don't know that certain real estate investments are better at producing passive income than others.

The best properties for passive income are single-tenant properties secured by triple net leases (NNN). That lease structure requires that the tenant covers building insurance, real estate taxes, and maintenance expenses. As a result, the landlord collects very steady rental income.

Anyone can invest in NNN real estate if they know where to look. Realty Income (NYSE: O) is a leader in owning these properties. The real estate investment trust (REIT) owns over 15,000 properties across the U.S. and Europe, secured by net leases. That strategic focus has enabled Realty Income to live up to its name by paying an unstoppable dividend.

A bankable income stream

Realty Income has paid 646 consecutive monthly dividends since its founding several decades ago. It went public in 1994 and has increased its dividend 124 times since then, including for the last 106 straight quarters. The REIT has grown its dividend at a 4.3% compound annual rate since its public listing roughly 30 years ago.

A big factor driving the overall stability of its dividend is its high-quality portfolio of net lease real estate. It has delivered positive earnings growth in 27 of the last 28 years, driven by rent growth and new acquisitions. The only down year was during the depths of the financial crisis in 2009, when its adjusted funds from operations (FFO) dipped modestly. However, even in that period, it exhibited the lowest operational and financial volatility among A-rated REITs in the S&P 500.

The company complements its durable portfolio with a conservative financial profile. Realty Income generated $2.8 billion, or $4.00 per share, of adjusted FFO last year. It paid a little more than 75% of that cash to shareholders in dividends. That enabled it to retain a meaningful amount of its cash flow to fund new investments.

Meanwhile, the REIT has an elite balance sheet. It has A-rated credit backed by a conservative leverage ratio. That further enhances its financial flexibility.

More growth ahead

Realty Income's dividend growth isn't likely to stop anytime soon. The REIT expects to deliver 4% to 5% annual adjusted FFO per share growth over the long term, roughly in line with its historical average. It expects rent growth and new investments to steadily drive its cash flow higher.

The company has a long growth runway ahead. It estimates that there's about $4.7 trillion of commercial real estate in the U.S. suitable for the traditional net lease structure that it could acquire in sale-leaseback transactions with owner-operators. These properties include freestanding retail, industrial, consumer-centric medical, and existing data centers.

Realty Income sees another $700 million of emerging net lease investment verticals (data center developments and gaming properties), further expanding its opportunity set. On top of that, there are another $2.6 trillion of net lease properties in the U.K. and an additional $5.9 trillion across the rest of developed Europe.

Realty Income has been steadily expanding its opportunity set by adding new investment verticals to its portfolio. For example, it made its first investment in the data center sector last November. It acquired an 80% interest in a joint venture constructing two 100% preleased data centers with built-in expansion potential. The REIT also entered several new European countries earlier this year in a sale-leaseback transaction with sporting goods retailer Decathlon.

With a strong financial profile, Realty Income should have no problem continuing to acquire income-generating real estate. The company plans to invest at least $2 billion into property acquisitions this year. Meanwhile, it will opportunistically acquire other net lease REITs to further enhance its scale (it closed its $9.3 billion acquisition of Spirit Realty earlier this year). The company's steadily growing portfolio will increase its cash flow, enabling it to continue pushing its dividend higher.

As passive as it gets

Realty Income's current dividend yield is around 6%. Put another way, every $1,000 invested in its stock would produce about $60 of annual dividend income (roughly $5 per month). The more you invest, the more passive income you'll collect. Likewise, the longer you hold, the more passive income you'll receive since the REIT's dividend should continue rising. That makes Realty Income an easy way to generate truly passive income from real estate.

Should you invest $1,000 in Realty Income right now?

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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. 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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