What Is the Best High-Yield Dividend Stock to Buy for Passive Income?

Investing in high-yielding dividend stocks is a great way to generate passive income. They enable you to produce more income from every dollar you invest, compared to a lower-yielding alternative. Meanwhile, the best ones steadily increase their payouts, which provides you with more income over time.

There are many high-quality, high-yielding dividend stocks. However, the best high-yield dividend stock to buy for passive income is Realty Income (NYSE: O).

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The real estate investment trust (REIT) pays a high-yielding dividend, backed by a strong financial profile. It also has an excellent history of steadily increasing its dividend. To top it off, it pays a monthly dividend, providing investors with a passive-income stream that aligns with their recurring monthly expenses.

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A high-quality, high-yielding monthly passive income stream

Realty Income currently has a dividend yield of more than 5.5%. That's well above the S&P 500's dividend yield of less than 1.5%. The REIT backs its high-yielding payout with a top-notch financial profile.

The REIT's foundation is its durable real estate portfolio. Realty Income owns over 15,600 rental properties (retail, industrial, gaming, and others) across the U.S. and Europe, net leased to roughly 1,600 credit-worthy clients doing business in 91 industries. Net leases provide it with very stable income because tenants cover all property operating expenses (property taxes, insurance, routine maintenance, and utilities).

Roughly 91% of the REIT's rental income comes from clients in industries resilient to economic downturns and isolated from the pressures of e-commerce. The company's portfolio is so durable that it only had one year when it didn't grow its adjusted funds from operations (FFO), which was during the financial crisis of 2009 when its adjusted FFO per share dipped slightly.

Realty Income pays out about 75% of its stable adjusted FFO in dividends. That conservative payout level provides it with a lot of breathing room. It retains the excess free cash (approaching $1 billion annually) to invest in additional income-generating net lease real estate.

The landlord further fortifies its financial foundation with an elite balance sheet and is one of 10 REITs in the S&P 500 with two bond ratings of A3/A- or higher. Realty Income's strong balance sheet gives it greater financial flexibility and allows it to borrow money at lower costs.

Realty Income's combination of stable income and financial strength has enabled it to pay a very bankable monthly dividend over the decades. It has declared 660 consecutive monthly dividends since its formation and has never suspended or reduced its payment since coming public in 1994.

A very steady dividend grower

Realty Income's steady rental income provides it with a very stable foundation from which to grow. The REIT has grown its adjusted FFO per share at around a 5% annual rate throughout its history, primarily by investing money to expand its real estate portfolio. That steadily growing income stream has enabled it to routinely increase its dividend.

The REIT has increased its dividend payment 131 times since its public market listing. It has streaks of 111 consecutive quarterly increases and 30 straight years of dividend growth and has grown its payout at a 4.2% compound annual rate during that period.

The company has ample room to continue expanding its portfolio in the future, and its increasing diversification has opened up new investment opportunities over the years. It has grown from its foundation in freestanding U.S. retail properties -- $2.6 trillion total addressable market (TAM) opportunity -- to add U.S. industrial properties ($2 trillion), U.S. gaming ($400 billion), U.S. data centers ($500 billion), and Europe ($8.5 trillion). That has expanded its TAM to $14 trillion.

In addition, the REIT has also added a credit investment platform and is building a U.S. private capital fund, further lengthening its growth runway.

Realty Income has the financial capacity to invest several billion dollars into new properties each year (it's targeting $4 billion of acquisitions this year). Those new additions should steadily increase its adjusted FFO per share, allowing the REIT to continue increasing its dividend.

Simply the best high-yielding dividend stock to buy for passive income

Realty Income stands out as the best high-yielding dividend stock to buy for passive income. It pays a high-yielding monthly dividend, backed by very stable cash flow and a fortress financial profile. The REIT also has an exceptional history of growing its earnings and dividends, which seems highly likely to continue.

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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.