Realty Income(NYSE: O) is one of the more popular real estate investment trusts (REITs), and it's easy to see why. The company has been a dividend-paying machine over the years. It has paid 651 consecutive monthly dividends. It has raised its payout for 108 straight quarters -- and 127 times overall since coming public in 1994 -- delivering 4.3% compound annual dividend growth over the last 30 years.
Income-focused investors who like Realty Income's steadily rising payout should check out fellow REITNNN REIT (NYSE: NNN). The company recently reached a dividend growth milestone, putting it in a very select group. Here's why it's another great option for those seeking a growing stream of passive dividend income.
An elite REIT
NNN REIT recently achieved a rare milestone. It delivered its 35th consecutive annual dividend increase. Only two other REITs and less than 80 publicly traded companies have reached that level.
Consistency and conservatism have played key roles in the REIT's ability to deliver such reliable dividend growth. NNN REIT has a very simple and focused investment strategy. It only invests in single-tenant triple net lease (NNN) retail properties. This lease structure, which Realty Income also uses, requires tenants to cover all of a property's operating costs, including routine maintenance, building insurance, and real estate taxes. That creates a very predictable stream of rental income.
It doesn't just buy any retail property. It focuses on well-located properties in strong markets, making it easier to replace tenants if needed and driving rent growth. It also owns a well-diversified portfolio of properties (nearly 3,550 locations leased to 375 national and regional retail tenants in over 35 lines of trade). While it's not quite as diversified as Realty Income (15,450 properties leased to over 1,550 clients in 90 industries across the retail, industrial, and gaming sectors), it has built a high-quality portfolio of income-producing retail properties.
NNN REIT also has a conservative financial profile. It has a low dividend payout ratio of around 70% of its core funds from operations (a little lower than Realty Income's 73.3% in the second quarter). It also has a very conservative balance sheet, with a sector-leading 12.6-year weighted average debt maturity. While its credit rating isn't as high as Realty Income's, it has a very sound balance sheet.
The room to grow
NNN REIT's conservative financial profile gives it the flexibility to continue investing in income-generating retail properties. It builds relationships with growing national and regional retailers. That enables it to steadily buy properties from them in sale-leaseback transactions, allowing its retail partners to recycle that capital back into expanding their footprints. About 72% of its acquisition volume has historically come via existing relationships. Those investments tend to have a higher real estate cap rate than market/auction deals.
The REIT invested $235 million in accretive deals to acquire 36 properties in the first half of this year. It has proactively raised additional capital, including by selling 20 properties for $85.8 million, to capitalize on future investment opportunities.
NNN REIT believes it can grow its core FFO per share by a mid-single-digit annual rate in the future by continuing to make accretive acquisitions (a similar growth rate as Realty Income). Because of that, it should be able to continue increasing its dividend.
Another great way to collect passive income
Realty Income is a leading REIT for those seeking a steadily rising dividend. However, it's not the only option. NNN REIT has an even longer record of increasing its dividend, which it seems likely to continue extending in the future. So, if you're looking for another income option (it offers a similar dividend yield as Realty Income at around 5%), NNN REIT is a great choice. Its focused investment strategy and conservative approach have really paid dividends for its investors over the years.
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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.
