Do you like passive income? Here’s how much a $10,000 investment in this dividend REIT could earn you

There are few things better than passive income. Getting paid month after month and year after year without having to work for it is a pretty magical thing. One of my favorite ways to earn passive income is by investing in real estate investment trusts (REITs).

REITs are among the best dividend-paying stocks because their structure requires them to pay out 90% or more of their taxable income to shareholders in the form of dividends. This leads to higher dividend yields, more consistent payouts, and the bonus of real estate diversification.

Domestic commercial properties (NNN -1.04%) is one of the most trusted dividend REITs. Right now, a $10,000 investment in the stock could earn you around $480 in annual passive income. Here’s a closer look at this dividend-paying stock and why you might want to add it to your shopping list.

Do business differently

National Retail Properties is a single-tenant commercial REIT that leases its approximately 3,270 properties to a wide range of commercial operators through long-term net leases.

Net lease is the most popular type of lease in the commercial industry because it places most of the work on the tenant for things like repairs, maintenance, and property taxes. What sets National Retail Properties’ business model apart is that it focuses on single-tenant properties that are primarily leased to lower-quality tenants who are not susceptible to e-commerce competition.

Single-tenant retail can be risky because revenue and occupancy levels are hit hard if and when a tenant leaves. But National Retail Properties has used this risk to its advantage. The company acquires properties in leading real estate sites and performs thorough due diligence on tenants before renting to them. Letting to lower quality tenants means they can buy and rent at better prices while making room for larger, higher quality tenants to take over the lease through acquisitions. For example, its largest tenant, 7-Eleven, only became a tenant through small tenant acquisitions.

It clearly worked. Currently, the occupancy rate is 99.2%, well above that of its retail REIT peers, and its occupancy rate has never fallen below 96.4% over the past its more than 30 years of operation.

It has persistent rent deferrals due to COVID-19-related closings, but its performance remains strong with revenue, earnings and funds from operations (FFO) – an important metric used to value a REIT – growing by year by year.

Image source: Getty Images.

Why National Retail Properties is a dividend dream

Over the past 20 years, National Retail Properties has delivered a total annual return of 11.6%, outperforming the S&P500 at the same time while increasing its dividend by 65%. It has increased its dividends for 32 consecutive years.

The company is also in a strong financial position with $53.7 million of cash on hand and no debt maturities before 2024. Its payout ratio is very manageable at 67% of its FFO and its debt to EBITDA (earnings before tax , income, depreciation and amortization) is just slightly above the REIT average of 5 times. In other words, it is in an ideal operational position to continue paying dividends and growing its business.

Shares of the company are still down 17% from pre-pandemic levels, likely due to lingering concerns for retail with the pandemic. But the current share price is an advantage for investors. According to its price-to-FFO ratio (a metric for REITs that works similarly to the price-to-earnings ratio for traditional stocks), its price is currently favorable at around 14 times its FFO. Plus, its 4.8% dividend yield means a $10,000 investment can do a lot.