3 Passive Income Machines to Buy Now for the Long Run

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Some companies have excellent track records of paying dividends. They consistently offer an above-average dividend yield and tend to raise their dividend payments over the long term. That makes them ideal options for those seeking passive income. 

Three companies that have been passive income machines over the years are Gladstone Commercial (GOOD), W. P. Carey (WPC 0.31%), and Equity Residential (EQR -3.58%). Here’s why three Fool.com contributors believe they are great stocks to own for the long haul. 

Gladstone Commercial has been paying dividends at a high rate since its 2003 IPO

Marc Rapport (Gladstone Commercial): Real estate investment trust (REIT) Gladstone Commercial has not missed a dividend since going public in 2003 and has been yielding almost 9%, at times higher, since the Great Recession.

The company pays a monthly dividend of $0.125, a payout that’s hardly budged in 15 years, but the yield has consistently been much higher than the average equity REIT. (The S&P 500 is currently yielding about 1.8%.)

Gladstone Commercial owns 136 properties spread across 27 states and its client list features 112 tenants in 19 industries. The trust’s current mix is 52% industrial and 44% office with a smattering of medical and retail properties. No tenant accounts for more than 4% of its rent roll and no single industry for more than 15%.

The trust’s homepage highlights the diversity of its tenant mix: a Citrix Systems facility in Florida, a Haier appliance factory in Georgia, JPMorgan Chase offices in Ohio and Utah, and a National Archives and Records Administration facility in Philadelphia.

Now could be a particularly good time to buy Gladstone Commercial. The company is actively seeking to shed office properties in favor of the stronger industrial sector and its current occupancy is at 97.3% with remaining lease terms averaging about seven years, which also is the average lease duration it’s seeking for its targeted acquisitions.

Meanwhile, shares are selling for about $17.30, down about 33% so far this year, and analysts rate this stock a buy with a consensus target price of $24.50. That’s a lot of upside, and if you’re buying for the long run, you’ll likely enjoy a reliable flow of dividend income at market-beating yield rates along the way.

A steadily rising dividend stream

Matt DiLallo (W. P. Carey): Real estate giant W. P. Carey is a dividend-paying machine. The diversified REIT has increased its dividend payment every year since its initial public offering in 1998, giving its investors a raise in most quarters. It has also made a few special dividend payments over the years. 

W. P. Carey should be able to continue boosting its dividend in the future. The REIT has two growth drivers. It benefits from steadily rising rental income across its existing portfolio because nearly all its long-term net leases feature annual rental escalation clauses, most of which have inflation-driven rate increases. With inflation running hot these days, its same-store net operating income growth rate has doubled this year.

Meanwhile, W. P. Carey has an excellent track record of making value-enhancing acquisitions. The REIT recently completed the $2.7 billion merger with a non-traded REIT it managed, which will boost its real estate income. In addition, it expects to acquire $1.75 billion to $2.25 billion of other properties this year. These new additions will provide an immediate boost to its rental income while increasing it over the long term as lease rates escalate. 

W. P. Carey has a reasonable dividend payout ratio and a solid investment-grade balance sheet. Those features give it lots of financial flexibility to fund new investments and raise its dividend. With its payout currently yielding 5.8%, it’s a great passive income stock to buy for the long haul.  

Rent increases follow property price increases

Brent Nyitray (Equity Residential): Equity Residential is an apartment real estate investment trust that focuses on luxury rental properties in upscale urban markets. The company has properties on the West Coast in Southern California, the San Francisco Bay Area, and Seattle, along with big East Coast cities like New York, Boston, and Washington, D.C. It also has properties in Denver and metro areas in Texas. 

The company’s strategy is to focus on cities with a strong employment market (especially for highly compensated knowledge workers), along with expensive single-family homes. Many younger workers in these locales are unable to afford a house, but they want to rent in a luxury building. These typical tenants fit into the HENRY category, which is an acronym for high earnings, not rich yet. They may be in their 20s, single, and seeking an urban environment. 

The real estate indexes are beginning to exhibit month-over-month declines. The most recent numbers from the Federal Housing Finance Agency (FHFA) showed that home prices declined 0.7% month over month in August. On a year-over-year basis they still rose by double digit percentages. The rise in home prices and mortgage rates have affected housing affordability, especially for first-time homebuyers. This means that much of Equity Residential’s tenant base will have little choice but to continue renting.

Although home prices do affect rental rates, rents generally lag home price appreciation by almost two years. The reason for this is that rents generally reset once a year, and the biggest resets happen when a tenant vacates the property. 

Despite the talk about a housing recession and declining home prices, Equity Residential just posted a 19.5% increase in funds from operations — a key metric of REIT performance — for the third quarter. The company’s 3.8% dividend yield is quite safe. 

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