JTypically, people wishing to retire will only be partially supplemented by their Social Security income. Building up your passive income is important for a successful retirement because it can bridge the gap between your income and your Social Security expenses.
My favorite source of passive income is dividend income. This is because, when done right, investors can see their income grow each year to keep up with inflation. Investing $10,500 in each of these real estate investment trusts (REITs) could help you reap $1,000 in annual dividend income upfront.
1. Trust in digital real estate
Data centers are physical locations that compute and store data. In the digital age, data centers are the glue that holds everything together. When individuals, businesses, or governments need to check email or transact online, they rely on well-functioning data centers to do so.
Economic expansion and emerging technologies like virtual reality are expected to result in promising growth for the data center industry. That’s why market research firm Allied Market Research predicts that the global data center industry will grow 10.5% every year, from $187.4 billion in 2020 to $517.2 billion. by 2030.
Digital Real Estate Trust (NYSE: DLR), with more than 290 data centers in 26 countries around the world, is among the largest data center REITs in the world. This leadership positions the company well to benefit from the strong growth prospects of the industry in the years to come.
Growth in major funds from operations (FFO) per Digital Realty share in the coming years won’t be the 10% annual rate it has been since 2005. But that’s because of the law of large numbers. not because of deteriorating fundamentals. The law of large numbers states that a company’s growth slows as it increases in size. Indeed, it takes more to move the needle of growth and fewer opportunities for growth present themselves at a certain point.
However, I believe Digital Realty will post mid-single-digit annual growth in basic FFO per share over the medium term. With a payout rate set at 71.2% in 2022, the dividend should increase in line with the core FFO per share.
Mid-single-digit annual dividend growth is an attractive proposition as Digital Realty offers investors a sizable dividend yield of around 3.8%. A $10,500 investment in the REIT would buy approximately 80 shares, generating $390 in initial annual dividend income for investors. This makes Digital Realty an excellent REIT for investors looking to generate significant long-term passive income.
2. STORE CAPITAL
With a portfolio of nearly 3,000 properties in 49 US states valued at $11.2 billion, Warren Buffett, argued STORE Capital (NYSE: STOR) is one of the largest REITs focused on single-tenant properties.
The REIT provides tenants with a source of capital in exchange for ownership of their commercial property, which helps tenants grow their business or pay down debt. Tenants then lease the real estate they sold to STORE Capital and agree to pay all expenses and a monthly base rent check to the REIT.
In addition to initial lease terms of over 10 years and annual contractual indexations of leases, this provides STORE Capital with steadily growing rental income. As a result, the company recorded FFO-per-share adjusted annual growth of 5.7% during its time as a public company.
With 2 million potential locations and an addressable market of $3.9 trillion, STORE Capital’s growth potential is expected to remain strong in the coming decades. And given that its dividend payout ratio was 67.5% in the first quarter of 2022, STORE Capital appears to be retaining plenty of capital to fund future growth opportunities.
That’s why I think STORE Capital’s dividend will increase by around 5-6% per year in the medium term. Combined with the stock’s impressive 5.8% dividend yield, this makes it an ideal mix of starting income and future income. A $10,500 investment in the stock would buy 398 shares, which would produce $613 in starting annual dividend income.
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Kody Kester holds positions at Digital Realty Trust and STORE Capital. The Motley Fool holds positions and recommends Digital Realty Trust and STORE Capital. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.