REITs are a low-cost way to generate passive income.
Investing in high-yielding dividend stocks can be a great way to start generating passive income. While the average dividend yield is relatively low today (the S&P 500's 1.4% yield isn't that far above its historical low of 1.1%), many companies offer much higher dividend yields.
For example, the real estate investment trust (REIT)sector is ripe with high-yielding dividend stocks. Realty Income (O -0.30%), Prologis (PLD -0.32%), and Camden Property Trust (CPT -0.75%) stand out as three of the top options for income-seeking investors. Their bigger payouts enable investors to produce more income from every dollar they invest, maximizing their income production.
Built to produce income
Realty Income certainly lives up to its name. The diversified REIT has paid 646 consecutive monthly dividends throughout its operating history. It has increased its payment 124 times since its public market listing in 1994, growing the dividend at a 4.3% compound annual rate.
The REIT currently offers a dividend yield approaching 6%. To put that into perspective, an investor can generate about $6 in annual dividend income for every $100 they invest in its stock. That compares to about $1.40 in annual dividend income from a similar investment in an S&P 500 index fund.
That already higher payout should continue heading higher in the future. Realty Income expects to grow its adjusted funds from operations (FFO) by 4% to 5% per share over the long term, driven by rent growth and new income-generating property investments.
The company has a long growth runway, which it routinely extends by adding new growth verticals. Over the past year, it has added data centers, gaming properties, and additional European countries to its portfolio, opening the doors to $6.6 trillion of potential new investment opportunities.
A dividend growth juggernaut
Prologis currently offers a dividend yielding around 3.3%, more than double that of the S&P 500. The leading industrial REIT stands out for its ability to grow its payout at an above-average rate. Over the last five years, Prologis has grown its dividend at a 12% compound annual rate. That's twice as fast as the S&P 500 and the REIT sector average.
And the industrial REIT should be able to continue delivering above-average dividend growth. Rent growth is a big driver. Demand for warehouses remains robust, driving high occupancy levels and market rent growth. That drives Prologis' view that its same-store net operating income will grow at a 7.5% to 8.5% annual rate through at least 2026.
Prologis has several other organic growth drivers, including development projects, energy investments, and its strategic capital platform. These internal growth drivers power its view that it can grow its core FFO per share by 9% to 11% annually through 2026. Meanwhile, the company has a strong balance sheet, giving it the financial flexibility to make accretive acquisitions as opportunities arise.
Focused on growth markets
Camden Property Trust currently yields 4.3% and has a solid track record of increasing its dividend. While the residential REIT hasn't increased its payout every year, it has grown by about a third since 2018.
The apartment owner has several drivers that should enable it to continue increasing its dividend. It focuses on owning rental communities in markets where the population and jobs are growing at above-average rates. That's driving higher occupancy rates and rental growth.
Camden's focus on growth markets also drives new expansion opportunities. It's currently investing nearly $550 million into five development projects, including its first two single-family rental home communities. Meanwhile, the company has nine more communities in its development pipeline, representing nearly $1.4 billion in future investment opportunities.
In addition, the company routinely invests in value-add projects to enhance its existing portfolio by renovating units, adding amenities, and making other investments to improve occupancy, retention, and rental income. Finally, the company has a strong balance sheet, giving it the financial flexibility to opportunistically acquire operating communities and land to support future developments.
These higher yields should continue rising
Realty Income, Prologis, and Camden Property Trust offer investors higher-yielding dividends. That enables them to maximize the income they generate from their investments. Further, all three REITs have excellent track records of increasing their dividends, which seems likely to continue. Those features make them great high-yield dividend stocks to buy right now.
Matt DiLallo has positions in Camden Property Trust, Prologis, and Realty Income. The Motley Fool has positions in and recommends Camden Property Trust, Prologis, and Realty Income. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
