Passive income is the holy grail of modern financial well-being. It’s the glorious ability to make money while you sleep, eat, or stare out of the window during a Zoom call.
If you aren’t earning passive income, you might be falling behind. The good news is that it’s not hard to get on the cash-generating bandwagon.
The power of compounding
The real power of earning extra income comes when you don’t spend it. What if, instead of taking your dividend income to the pub, you reinvest it to create even more cash?
Suppose you invest £20,000 into a Stocks and Shares ISA and get an average 4.42% dividend yield. You’ll get £885.70 in the first year – partly by avoiding dividend tax.
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If however, you reinvest that at the same rate, you’ll get £923.07 the next year. And if you keep going, that increases to £1,304 in year 10, £2,010 in year 20, and £3,098 in year 30.
Over time, the difference really adds up. So for those who can, reinvesting at high rates of return can really pay off in the long run.
A passive income giant
Realty Income (NYSE:O) might be one of the most consistent dividend stocks on the market. It’s been returning cash to shareholders for 670 consecutive months.
The stock’s returned 5,290% since it went public. But with most of that coming from the dividend, it might not be too late to thinking about buying.
The current dividend yield is 5.21% – or 4.42% after a 15% tax. That’s lower than some UK real estate investment trusts (REITs) but it’s been pretty durable.
The returns have also been increasing. It has over 50 years of consecutive dividend increases, which does a lot to offset the effects of inflation over the long term.
What’s the secret sauce?
Realty Income’s been a model of dividend consistency. And the reason for that is its incredibly strong operational metrics.
Here are some of the highlights:
- Portfolio occupancy: 98.9%.
- Weighted Average Unexpired Lease Term: 8.7 years.
- Weighted Average Cost of Debt: 3.9%.
- Weighted Average Debt Maturity: 5.9 years.
These are all very positive from a long-term passive income perspective. But Realty Income’s debt maturity is shorter than its lease time. That means it will have to refinance its debts before it can renew its leases. This creates a duration risk and it makes being in a strong position to negotiate with lenders vital.
Diversification
Realty Income has a highly diversified client base – 1,786 tenants across 92 industries. That gives the firm some protection against anything going wrong with one of them. The quality of these tenants is also elite. The firm focuses on recession-resistant industries, such as groceries and convenience stores.
On top of this, 41% of its income comes from tenants with investment-grade balance sheets. And the risk of rising maintenance costs is eliminated via triple-net lease contracts.
All of this makes the company’s future income more predictable. Importantly, it also helps with negotiating better lending terms.
A stock to buy?
Realty Income isn’t a high-octane business. But what it does do very well is generate passive income for investors.
Is it worth considering? I think so – it’s hard to argue with the firm’s track record and it’s hard to see any major disruption on the horizon.
Should you invest £5,000 in Realty Income right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Realty Income made the list?
Stephen Wright owns shares in Realty Income.
