3 Super-Reliable Real Estate Stocks to Buy and Hold for Passive Income

Key Points

• Essex Property Trust has increased its dividend for 31 straight years.

• Federal Realty Investment Trust is the REIT sector leader, having increased its dividend for 58 consecutive years.

• Realty Income has raised its dividend for 111 quarters in a row.

• 10 stocks we like better than Realty Income ›

Investing in real estate is a great way to make passive income. While you could buy a rental property, a more passive and lower-cost option is to invest in a real estate investment trust (REIT). These entities own portfolios of high-quality properties that generate rental income.

Essex Property Trust (NYSE: ESS), Federal Realty Investment Trust (NYSE: FRT), and Realty Income (NYSE: O) are three of the most reliable dividend-paying REITs. Here's what makes them super-safe options for those seeking to generate durable passive income from real estate.

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Its geographical focus has paid dividends

Essex Property Trust is a residential REIT focused solely on the West Coast. Those markets benefit from durable and growing housing demand. While household incomes are high, homeownership costs are even higher, which drives demand for high-quality rental housing. That benefits Essex Properties Trust by keeping occupancy rates high across its portfolio while driving steady rent growth.

Over the past 20 years, Essex Property Trust's same-property net operating income has grown by 126%, which is significantly faster than the 103% average growth rate of its multifamily REIT peers. During the same period, Essex Property's core funds from operations (FFO) increased by 276%, outpacing the 126% peer average.

These growth rates have enabled Essex to raise its dividend at more than double the average pace of its peers -- 216% for Essex compared to 97% for the peer group. Since becoming a public company, Essex Property Trust has increased its dividend for 31 consecutive years by a cumulative 516%.

Essex is in an excellent position to continue increasing its dividend. The company maintains a conservative dividend payout ratio and a strong balance sheet, providing it with the flexibility to continue investing in its growing portfolio by acquiring and developing new apartment communities. Add that external growth to continued rental increases, and Essex's nearly 4%-yielding dividend should keep rising.

Focused on quality over quantity

Federal Realty Investment Trust is a retail REIT with a very narrow investment focus. It owns high-quality mixed-use properties and open-air shopping centers in first-ring suburbs of strategically selected metro markets. It seeks to own the best retail-oriented properties in areas with the best demographics (a high density of high-income earners).

This strategy of owning quality over quantity has really paid off over the years. Since 2005, Federal Realty has increased its FFO per share by more than 134%. For comparison, two of its larger peers have delivered FFO growth rates of 25% and -14% during that period. That has enabled the company to continue increasing its dividend, which it has done for a REIT sector-leading 58 consecutive years.

Federal Realty remains laser-focused on having the highest-quality real estate portfolio. It routinely recycles capital by selling properties with limited growth potential to fund new investments in higher-quality properties with more upside.

For example, the company recently sold a 181,000-square-foot portfolio of retail properties on Hollywood Boulevard for $69 million, as well as a 108-unit residential property for $74 million. It used those funds to help buy two dominant open-air retail centers in one of the most affluent and fastest-growing submarkets of Kansas City for $289 million. This strategy helps support the REIT's continued growth, which should enable it to maintain its industry-leading dividend record.

Built on a strong foundation

Realty Income's mission is to pay dependable monthly dividends that steadily rise. The diversified REIT has been very successful in achieving that aim. It has increased its payment 131 times since its public market listing in 1994. The REIT has raised the dividend for 111 consecutive quarters and more than 30 straight years.

Realty Income focuses on investing in properties that produce very stable rental income. It owns retail, industrial, gaming, and other properties secured by long-term net leases with many of the world's leading companies. Net leases require tenants to cover all property operating costs, including routine maintenance, real estate taxes, and building insurance. The landlord also focuses on owning properties leased to tenants in industries resilient to economic downturns and the pressures of e-commerce, such as grocery stores, convenience stores, and home improvement centers.

Realty Income's earnings are so durable that it has only had one year when it didn't grow its adjusted FFO per share (2009). Overall, its adjusted FFO per share has increased at a more than 5% annual rate, which has supported 4.2% compound annual dividend growth. Realty Income has grown by using its elite balance sheet to steadily acquire more income-generating properties.

Durable dividend stocks

Federal Realty Trust, Essex Property Trust, and Realty Income have three of the best dividend track records in the REIT sector. They have delivered decades of dividend increases, which seem likely to continue. That makes them great stocks to buy for those seeking very resilient passive income streams.

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Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.