Investing in real estate can be a great way to generate durable passive income. There are many ways to invest in the sector. One of the smartest ways to start is to buy shares in high-quality real estate investment trusts (REITs).
W.P. Carey(NYSE: WPC) and Essex Property Trust (NYSE: ESS) are no-brainer REITs to buy for long-lasting passive income. They offer high-yielding payouts that should steadily rise in the future.
Building back better
W.P. Carey had delivered a quarter century of consecutive annual dividend growth until last year. However, the diversified REITmade the strategic decision to exit the troubled office sector. In doing so, it also opted to reset its dividend to a more conservative level.
The REIT is now rebuilding its portfolio, focusing on properties with better long-term fundamentals, like industrial real estate. It invested $641 million into new properties in the first half of this year, including $190 million into a 19-property industrial real estate portfolio. That sector now supplies 64% of its rental income. The REIT also owns high-quality retail properties, accounting for 21% of its rent, as well as other properties, including a portfolio of operated self-storage facilities. This high-quality portfolio features operationally critical properties leased to high-quality tenants.
Most of its leases are triple net (NNN), which requires tenants to cover operating expenses like routine maintenance, real estate taxes, and building insurance. Furthermore, as 53% of its leases link rents to inflation, it collects a steadily rising stream of rental income. Its rents rose at a 2.9% annualized pace in the second quarter.
Rising rents and a growing portfolio should enable W.P. Carey to increase its high-yielding dividend. The REIT has already raised its payout three times since the reset last year. It currently yields more than 5.5%, putting it several times higher than the S&P 500's dividend yield of less than 1.5%. With more growth ahead, it's a no-brainer for those seeking an attractive and steadily rising passive income stream. A $500 investment could generate more than $27.50 of dividend income each year.
Its location focus continues to pay dividends
Essex Property Trust has been a dividend growth machine over the years. The apartment REIT has increased its payout for 30 straight years, delivering 487% cumulative dividend growth since its IPO. Since 2007, Essex has grown its dividend 2.2 times faster than its peers -- 166%, versus 76%. It currently offers an attractive 3.3% yield.
The REIT has benefited from its focus on the West Coast. That strategy has paid big dividends over the years. Essex has benefited from constrained housing markets where demand is high because of job growth while many factors have limited supply. That has kept occupancy rates high across its portfolio, enabling it to raise rents at an above-average rate. For example, its same-store net operating income has risen 88% since 2007, faster than the 75% growth rate of its peers.
Essex Property has enhanced its growth rate through external growth drivers and value optimizations. The REIT acquires operating properties, invests in development projects, and provides funding to other developers. Meanwhile, it optimizes the value of its existing properties through efficiency initiatives, redevelopment projects, and data and analytics.
The REIT's growth drivers remain strong. Demand is robust because of strong employment while supplies are limited. In addition, it has a strong balance sheet, which should enable it to continue making value-enhancing investments. For example, it acquired a 164-unit property for $101 million in the second quarter and bought out its joint venture partner's interest in a 269-unit property valued at $117 million. Future investments and rent growth should enable Essex Property to continue pushing its payout higher.
Built to produce passive income
W.P. Carey and Essex Property Trust offer investors high-yielding dividends that should steadily rise in the future. A big factor driving their payouts higher is their real estate investment strategies focused on properties benefiting from growing demand. They should be able to continue to pay dividends for decades to come, with those payouts likely to rise over the long term.
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Matt 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.
