Income

Want $1,000 in annual passive income? These 2 sizzling actions stand out

Berkshire HathawayBillionaire Chairman and CEO Warren Buffett is known for many of his wisdom-filled quotes. One of my favorites is, “If you can’t find a way to make money while you sleep, you’ll work until you die.”

Of course, people can rely on Social Security income in their golden years. But that typically only brings in 40% of the average earner’s pre-retirement income. Overall, investing in a type of asset that will appreciate and/or provide reliable passive income in the form of dividends is the only way to achieve complete financial freedom.

There is, of course, no guarantee that companies will pay consistent or increasing dividends forever, but some investments have better odds than others. Real estate investment trusts (REITs), for example, are legally required to pay out a significant portion of their profits in the form of dividends. As a result, investors with $16,800 available to invest could generate a starting annual dividend income of $1,000 by dividing their investments equally between these two REITs now. And if you don’t have that much starting capital to invest, the good news is that it can scale depending on what you have.

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1. VICI properties

When we talk about casinos, we often say that the house always wins. Indeed, the probability that its customers win a jackpot is largely compensated by the fact that these same customers lose the money wagered to have a chance of winning the jackpot, which generates revenue for the casino.

VICI properties (VICI -0.10%) owns major casinos like MGM Resorts International and Entertainment Caesars. The REIT owns 43 of the best properties in the world, such as the MGM Grand Las Vegas. And it’s the go-to business when casinos want to unlock the value of their real estate by reselling and renting it out.

This allows casinos to invest in expanding their business or paying off debt. And that also benefits VICI Properties: the REIT has a weighted average lease term of 43 years, and almost all of its leases will be tied to the long-term inflation rate. Even before considering possible real estate acquisitions, this reinforces both the visibility of rental income and the potential for growth from the outset.

These characteristics have allowed VICI Properties’ dividend to rise to nearly 8% per year over the past three years. This growth was funded by similar growth in adjusted funds from operations (AFFO) per share during this period. As a result, the stock’s payout ratio of 77% is only slightly higher than its target payout ratio of 75%. This should provide annual dividend growth of at least mid-digits, which represents attractive growth potential given VICI Properties’ market-beating dividend yield of 4.6%. For context, it’s almost triple the S&P500 return of 1.6% of the index.

Even better, income investors can acquire shares of VICI Properties at a forward price on an AFFO ratio per share of just 16.3. An $8,400 investment in the stock could buy 267 shares, generating $384 in starting annual dividend income.

2. Medical Properties Trust

Few business models are as stable as hospitals. Each year, less than 1% of hospitals close. With a portfolio of approximately 440 hospitals worldwide valued at $22.2 billion, Medical Properties Trust (MPW 1.55%) is one of the main funders of hospitals.

The hospitals receive a capital injection in exchange for selling their real estate to the REIT and renting it out. Hospitals can use these funds to expand their client base or pay down debt. Hospitals agree to pay all costs associated with their rented properties and pay a base rent check to Medical Properties Trust each month.

And if that weren’t enough, Medical Properties Trust’s initial lease terms are 10-20 years in the US and even longer internationally. In addition to the fact that 99% of the company’s leases are linked to inflation or fixed increases, Medical Properties Trust’s rental income and AFFO per share may increase from year to year.

Despite the impressive size of the company’s portfolio, the company still has plenty of room to continue growing in the years to come. Indeed, its portfolio represents only a fraction of the more than $1 trillion global hospital real estate market. With Medical Properties Trust retaining around 20% of its AFFO to reinvest in property acquisitions, the company also has the capital to continue growing. That makes its astonishing 7.3% dividend yield safe.

And at a consensus AFFO multiple of less than 11, Medical Properties Trust is very cheap. Investors with $8,400 can buy 531 shares of the stock, which would result in a loss of $616 in starting annual passive income.

Kody Kester holds positions in Medical Properties Trust and VICI Properties Inc. The Motley Fool holds and recommends Berkshire Hathaway (B shares). The Motley Fool recommends VICI Properties Inc. and recommends the following options: $200 long calls on Berkshire Hathaway (B shares) January 2023, $200 short put options on Berkshire Hathaway (B shares) January 2023 and short calls of $265 from January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.