My Favorite Real Estate Passive Income Stock for 2023

The company is benefiting from inflation-driven tailwinds.

My Favorite Real Estate Passive Income Stock for 2023

One of my financial goals is to grow my passive income from dividends to $1,000 a month. I've got a way to go, so I'm focused on opportunities to help me reach that goal faster. I'm seeking companies that already pay an above-average dividend that they can grow in the future.

This year, my favorite real estate stock for passive income is W. P. Carey (WPC 3.21%). The diversified real estate investment trust (REIT) offers a more than 5% dividend yield, which is well above the S&P 500's 1.7% dividend yield. Further, the company should be able to continue increasing that payout, thanks partly to inflation-driven rent growth. I plan to add more of the company's growing dividend income to my portfolio this year. Rock solid rental income

W. P. Carey owns a diversified portfolio of operationally critical real estate. It has over 1,400 properties across the industrial, warehouse, office, retail, and self-storage sectors. The REIT primarily leases these properties to tenants using triple-net (NNN) terms, making them responsible for covering maintenance, real estate taxes, and building insurance. These features enable W. P. Carey to produce very steady rental income.

The diversified REIT pays out a generous portion of its rental income to investors via the dividend. Last year, the company expected to generate between $5.25 and $5.31 per share of adjusted funds from operations (FFO). With its most recent dividend payment giving it an annualized rate of $4.26 per share, it has a payout ratio of around 80%. That's a comfortable level for a REIT that produces steady rental income.

Another factor supporting W. P. Carey's dividend is its solid investment-grade balance sheet. W. P. Carey has a low leverage ratio, primarily fixed-rate, long-term debt, and lots of liquidity. That gives it tremendous financial flexibility.

More dividend growth ahead

W. P. Carey has increased its dividend each year since its initial public offering in 1998. That streak isn't likely to end anytime soon. Driving that view is the company's inflation-driven rent growth and excellent acquisition track record.

The company primarily signs long-term leases with tenants, over 99% of which have contractually set annual rent increases. Roughly 40% of its lease rates rise at a fixed rate, while another 55% grow at a rate linked to the consumer price index (CPI). With inflation -- as measured by CPI growth -- rising fast over the past year, W. P. Carey's rents are growing briskly. The company's same-store annual base rent increased by 3.4% in the third quarter, more than double the rate at the end of 2021.

The company expects inflation to continue driving strong rent growth in the coming quarters. CEO Jason Fox stated in the REIT's last earnings report, "We also continue to benefit from our sector-leading same-store rent growth, which reached a new high during the quarter, driven by inflation. As current CPI numbers flow through to rents, we expect our same-store growth to move even higher in 2023, and to continue seeing the benefits into 2024."

In addition to faster rent growth, W. P. Carey should benefit from the continued expansion of its global real estate portfolio. The company acquired $1.3 billion of properties through the third quarter of 2022. In addition, it completed its merger with CPA:18, a non-traded REIT it managed, adding another $2.2 billion of real estate assets.

The company expects to continue acquiring income-producing real estate. Those deals should be even more accretive in the future, given the recent rise in interest rates to combat inflation, which is weighing on real estate valuations. The CEO stated in the earnings report, "While cap rates have been slow to adjust to sharply higher interest rates, deal pricing is increasingly getting more interesting, and our balance sheet puts us in a position of strength to deploy capital at appropriate spreads -- having raised debt and equity capital at attractive prices and armed with over $2 billion of liquidity." By raising capital when it was cheaper, W. P. Carey is in an excellent position to capitalize on opportunities to acquire income-generating real estate at higher cap rates, making future deals even more accretive to its adjusted funds from operations (FFO) per share.

That combination of rent growth and accretive acquisitions should enable W. P. Carey to continue growing its dividend in 2023 and beyond.

Inflation-driven passive income

W. P. Carey offers a rock-solid dividend with an above-average yield. The diversified REIT should be able to continue growing that payout in 2023, thanks partly to its inflation-linked rental contracts. That's why I plan to buy even more shares of the diversified REIT this year to reach my passive income goal even sooner.

Matthew DiLallo has positions in W. P. Carey. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.