Want $1,000 in Passive Income? Invest $3,750 in these 3 stocks and wait 5 years

There are many ways to start earning passive income. One proven method is to invest in real estate. Although there are many options, the cheapest and most passive way is through real estate investment trusts (REITs).

For example, $3,750 invested evenly in Real estate income (O 1.25%), WP Carey (WPC 0.14%)and Medical Properties Trust (MPW -0.33%) is expected to generate over $1,000 in cumulative passive income over the next five years. Here is a closer look at these calculations and why these REITs are great options for investors looking to start collecting passive income.

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Growth in Passive Income Streams

Realty Income, WP Carey, and Medical Properties Trust stand out among the top REITs for income-seeking investors. All three REITs offer above-average offers dividend yields ranging from 4.3% to 6.4%. Plus, they have a long history of growing their dividends. Because of this, we can project their future revenue streams with relatively high confidence.

For example, $1,250 invested in each REIT should generate approximately $200 of combined annual passive income over the next year. Assuming no dividend growth, this trio will produce just under $1,000 in cumulative passive income over the next five years. However, if we predict that they can continue to increase their payouts at a low single-digit annual rate, they would easily exceed $1,000 in cumulative passive income:

A graph showing the passive income potential of these three REITs.

Data source: author’s calculations. Table by author.

Why These REITs Should Generate Sustainable Passive Income Growth

Although most REITs pay dividends, not all are great options for investors looking to generate passive income. Some REITs pay a lower than average dividend because they hold on to more cash to expand their portfolios. Meanwhile, other REIT dividends look unsustainable due to their lack of growth prospects or worrying financial profiles. This sets Realty Income, WP Carey, and Medical Properties Trust apart because they pay above-average dividends that they can sustain and grow for years to come.

Realty Income has increased its dividend for more than 25 consecutive years. The REIT focuses on owning triple net leased properties (NNN) tenants resilient to e-commerce disruption and economic downturns. This rental structure provides very stable rental income, while its tenants focus on protecting its portfolio against deteriorating market conditions.

Meanwhile, the REIT has a top financial profile, giving it the flexibility to pay out an attractive dividend while acquiring more cash-generating real estate. Realty Income has increased its dividend at a compound annual rate of 4.4% since its initial public offering (IPO) in 1994. Given its strong financial profile and durable portfolio, the REIT looks likely to continue to produce a growing stream of passive income.

WP Carey has given its investors a raise every year since its IPO in 1998. It has a diversified portfolio operationally critical real estate leased to tenants in the office, industrial, warehouse, retail and self-storage sectors. This diversification and rental structures have helped provide WP Carey with stable rental income to support its dividend and continue to acquire more income-generating commercial real estate. Add to that its strong balance sheet and WP Carey should be able to continue to steadily increase its dividend for years to come.

Finally, Medical Properties Trust achieved its ninth consecutive annual dividend increase this year. The hospital center Healthcare REITs has increased its payment at a compound annual rate of 3.8% since 2018. The REIT leases these properties to hospital operators under net leases, which provides it with very stable rental income. In the meantime, it has a strong balance sheet and a healthy dividend payout ratio, giving it the flexibility to pay out its dividend while continuing to acquire hospital real estate. Medical Properties sees a huge opportunity to continue buying hospitals, which should allow it to continue to increase its dividend.

A great way to start generating passive income

REITs are an easy place to start earning passive income. A relatively small investment in a handful of high-quality REITs can produce a surprising amount of passive income over a few years. For this reason, those looking to start receiving passive income should take a closer look at Realty Income, Medical Properties Trust, and WP Carey.