Real estate investment trusts (REITs) are a great way to generate passive income. They produce stable rental income by owning commercial real estate and distribute the bulk of those funds to investors via dividends. At the moment the average REIT yields 4%, which is more than double the payout of stocks in the S&P 500.
Given the sector's above-average yield, many REITs are attractive options for income investors. Three that stand out right now are Community Healthcare Trust (NYSE: CHCT), Realty Income (NYSE: O), and W.P. Carey (NYSE: WPC). Not only do they offer above-average yields for the REIT sector but they also have a history of consistently growing their payouts.
A healthy income stream
Community Healthcare Trust is a healthcare REIT focused on acquiring and operating properties leased to hospitals, doctors, healthcare systems, and healthcare service providers. It concentrates on buying real estate located outside urban centers in geographic areas where the population is growing at an above-average pace.
This strategy has paid dividends for its investors over the years. The REIT has increased its payout every quarter since its initial public offering (IPO) in 2015 and currently yields 4.3%.
That upward trend in the REIT's dividend should continue thanks to its visible acquisition pipeline and conservative financial profile. It acquired seven properties and a land parcel during the second quarter for $21.3 million. Meanwhile, it signed contracts or term sheets to buy another 15 properties totaling $116.3 million that it expects to close by the middle of next year. It has ample financial flexibility to fund these deals thanks to its low leverage ratio and available credit. Because of that, the REIT should be able to continue supplying its investors with a healthy dose of income.
Built for income
Realty Income is an income investor's dream REIT. The company has paid a dividend -- which currently yields 4.5% -- for an impressive 603 consecutive months. Even better, it has increased that payout 108 times since its IPO in 1994. Because of that, the REIT lives up to its trademark as The Monthly Dividend Company since it provides investors with dependable monthly income.
One factor driving this durability is its top-notch balance sheet as it's one of just eight REITs with A-rated credit. It also has a conservative dividend payout ratio of 81.5% of its AFFO during the second quarter, which is impressive considering it only collected 86.5% of the rent it billed in the period due to the turmoil caused by the COVID-19 outbreak. Realty Income's rental collection rate has held up better than most retail REITs because it focuses on owning free-standing properties secured by triple net leases with tenants that mainly sell essential goods.
Meanwhile, its top-tier balance sheet also gives it the flexibility to continue acquiring properties. Because of that, its income stream should keep heading higher.
A diversified income stream
W.P. Carey has benefited from its diversified approach this year. Overall, the REIT collected 97% of the rent it billed during the second quarter, which improved to around 99% during the third quarter. Because of that, it has had no problem covering its 6.2%-yielding dividend.
Meanwhile, the REIT also has a solid investment-grade balance sheet, which has given it the financial flexibility to take advantage of acquisition opportunities. For example, the company recently completed a $40 million sale-leaseback transaction for a light manufacturing facility and a $44 million deal for two state-of-the-art food manufacturing facilities, all backed by long-term triple net leases. Those and future deals should enable W.P. Carey to continue increasing its dividend, which it has now done for more than 20 consecutive years.
Rock-solid income streams
REITs have gone through the wringer this year. While some have had to reduce their dividends to survive the turmoil others have continued increasing them thanks to the strength of their portfolios and balance sheets. Community Healthcare Trust, Realty Income, and W.P. Carey are in that latter group, making them excellent options for investors looking for generous income streams backed by commercial real estate.