One of my financial goals is to increase my passive dividend income to $1,000 per month. I have a long way to go, so I’m focusing on opportunities that will help me reach this goal faster. I look for companies that are already paying an above-average dividend that they can grow in the future.
This year, my favorite real estate stock for passive income is WP Carey (WPC 3.21%). The diversified property investment fund (REITs) offers a dividend yield of over 5%, which is well above the S&P500is 1.7% dividend yield. Moreover, the company should be able to continue to increase this payment, thanks in part to the growth of rents linked to inflation. I intend to add more of the company’s growing dividend income to my portfolio this year.
Solid rental income
WP Carey owns a diverse portfolio of operationally critical real estate. It has over 1,400 properties in the industrial, warehouse, office, retail and self-storage sectors. The REIT primarily leases these properties to tenants using triple net (NNN), instructing them to cover the maintenance, property taxes and insurance of the building. These characteristics allow WP Carey to generate very stable rental income.
The Diversified REITs pays a generous part of its rental income to investors via the dividend. Last year, the company expected to generate between $5.25 and $5.31 per share in adjusted funds from operations (FFO). With its latest dividend payment giving it an annualized rate of $4.26 per share, it has a payout ratio of around 80%. This is a comfortable level for a REIT that produces stable rental income.
Another factor supporting WP Carey’s dividend is its strong investment-grade balance sheet. WP Carey has a low debt ratio, mostly long term fixed rate debt and plenty of cash. This gives him great financial flexibility.
More dividend growth ahead
WP Carey has increased its dividend every year since its IPO in 1998. This streak is not expected to end anytime soon. This view is driven by inflation-linked rental growth and the company’s excellent acquisition history.
The company mainly signs emphyteutic leases with tenants, more than 99% of whom have contractually fixed annual rent increases. About 40% of its rental rates increase at a fixed rate, while another 55% increase at a rate tied to the Consumer Price Index (CPI). With inflation – as measured by CPI growth – rising rapidly over the past year, WP Carey’s rents are rising rapidly. The company’s same-store annual base rent rose 3.4% in the third quarter, more than double the rate at the end of 2021.
The company expects inflation to continue to drive strong rental growth in the coming quarters. Chief Executive Jason Fox said in the REIT’s latest earnings report, “We also continue to benefit from our industry-leading same-store rent growth, which reached a new high over the past in the quarter, due to inflation.While the current CPI numbers impact rents, we expect our same store growth to increase even further in 2023 and continue to see earnings in 2024.”
In addition to faster rental growth, WP Carey should benefit from the continued expansion of its global real estate portfolio. The company acquired $1.3 billion in properties during the third quarter of 2022. Additionally, it completed its merger with CPA:18, an unlisted REIT it managed, adding another $2.2 billion. real estate assets.
The Company plans to continue to acquire income producing properties. These transactions should be even more accretive in the future given the recent rise in interest rates to combat inflation which is weighing on real estate valuations. The CEO said in the earnings report: “While capitalization rates have been slow to adjust to significantly higher interest rates, transaction pricing is becoming increasingly attractive and our balance sheet puts us in a strong position to deploy capital at appropriate spreads — having raised debt and equity at attractive prices and armed with over $2 billion in liquidity.” By raising capital when it was cheaper, WP Carey is in an excellent position to capitalize on opportunities to acquire income-generating real estate at higher cap rates, making future transactions even more accretive. for its adjusted operating funds (FFO) per share.
This combination of rental growth and accretive acquisitions should allow WP Carey to continue to increase its dividend in 2023 and beyond.
Passive income based on inflation
WP Carey offers a rock-solid dividend with an above-average yield. The diversified REIT should be able to continue to increase this payment in 2023, thanks in part to its inflation-indexed leases. That’s why I plan to buy even more Diversified REIT stocks this year to reach my passive income goal even sooner.