Investors looking for stocks that can produce heaps of passive income are often tempted by ultra-high-yield stocks that offer yields more than triple the market average. Unfortunately, a dividend stock's yield rarely rises to such heights unless investors have good reasons to worry about future cash flows being sufficient to raise the payout further.
When the stock market opened on May 28, shares of Realty Income(NYSE: O) and NNN REIT(NYSE: NNN) were down by 30% and 29%, respectively, from peaks they set in 2020. Their stock prices are down, but not the dividend payments they send out. Both companies have steadily raised their payouts and currently offer yields that are more than triple the average yield you can receive from stocks in the benchmarkS&P 500 index.
Rising bond yields are the No. 1 issue pressuring the prices of these two real estate investment trusts (REITs). The risk-free rate investors can receive from U.S. Treasuries is a lot higher than it was the last time these stocks peaked.
Unlike Treasuries, these two dividend payers regularly raise their payouts. Here's why most income-seeking investors should consider adding shares of both to their portfolios.
Image source: Getty Images.
1. Realty Income
Realty Income acquired its first commercial property in 1970, and at the end of March 2025, its portfolio had grown to over 15,600 buildings. Spread throughout the U.S. and nine European countries, it's one of the more geographically diverse REITs you can invest in.
Returning a steadily increasing profit has been this REIT's primary focus since its inception, and it has succeeded. Since becoming a publicly traded company in 1994, it has raised its monthly dividend payout every quarter. Individually, those raises seem insignificant, but steady movement in the right direction adds up over time. Realty Income has raised its payout by 46% over the past decade. A rising dividend payout coupled with a declining stock price has lifted the yield this stock offers to a juicy 5.7% at recent prices.
There have been plenty of economic downturns since 1994, but Realty Income has been able to weather them thanks to a tried and true business model for commercial property owners. Nearly all of this REIT's tenants sign net leases that hold the lessee responsible for variable expenses associated with building ownership, such as insurance, maintenance, and taxes. With rent escalators written into lease agreements that are typically 10 to 20 years long, incoming cash flows are highly predictable.
In addition to a well understood net lease strategy, Realty Income's size and reputation allow it to borrow at lower interest rates than nearly all its peers. For example, it raised $600 million at 5.125% over a 10-year period this April. That's only about 0.7 percentage points higher than the rate institutional investors receive these days from 10-year Treasury notes that are backed by the full faith and credit of the U.S. government.
Realty Income's portfolio is enormous, but the vast majority of commercial properties out there are not yet owned by net lease REITs. With access to cheap capital and a large addressable market, there's a strong chance this stock can keep raising its payout for years.
2. NNN REIT
Investors new to REITs can think of NNN REIT as a smaller version of Realty Income. Its commercial property portfolio contained 3,641 buildings at the end of March. Unlike its larger peer, this net lease REIT's entire portfolio is located in the U.S.
While located entirely in the U.S., there is some diversity to NNN REIT's portfolio. Its largest tenant, 7-Eleven, is responsible for just 4.5% of all the rent payments it receives annually. Its five largest tenants are responsible for less than 19% of annualized base rent.
A limited geographic footprint would limit growth for a REIT the size of Realty Income, but NNN REIT is still small enough that the U.S. market for sale-leaseback transactions alone can support a satisfactory growth rate. This stock has raised its quarterly dividend for 35 consecutive years. It isn't rising at a blazing pace, but the payout is up by 33% over the past decade.
At recent prices, NNN REIT offers a big 5.6% dividend yield and a great chance to see the payout continue rising steadily. In the first quarter, funds from operations (FFO), a proxy for earnings used to evaluate REITs, grew 3.6% year over year to $0.85 per share. That's more than it needs to support a quarterly dividend payout currently set at $0.58 per share. Adding some shares to a diversified portfolio now and holding forever looks like the right move.
Should you invest $1,000 in Realty Income right now?
Before you buy stock in Realty Income, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $653,389!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $830,492!*
Now, it’s worth notingStock Advisor’s total average return is982% — a market-crushing outperformance compared to171%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
