My Top REIT to Buy in 2025 for Passive Income

Last year was another challenging one for the commercial real estate sector. While the Federal Reserve started reducing interest rates, it didn't cut them as fast as the market expected due to stubbornly high inflation. Higher rates acted as a headwind for the sector, impacting property values and the ability of real estate investors to borrow money to fund new real estate deals.

As a result, the average real estate investment trust (REIT) delivered a meager return last year. The S&P U.S. REIT Index only gained 4.3%, significantly underperforming the S&P 500's 25% total return.

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Despite the sector's poor performance in recent years, REITs have outperformed stocks over the longer term. That's one of the many reasons why I've continued to buy more shares of several REITs over the past few years. I plan to continue doing so in 2025. My top REIT to buy this year is Realty Income (NYSE: O). It has been a prodigious passive income producer over the years, contributing to its strong total returns over the long term. Those are some of the many reasons why I think it's the top REIT to buy this year.

The name says it all

Realty Income has been an income-generating machine over the years. The REIT has paid 654 consecutive monthly dividends. It has increased its payment 128 times since its public market listing in 1994, which includes the last 109 quarters in a row. Overall, Realty Income has delivered 30 consecutive annual years of increasing its dividend. It has grown its payout at a 4.2% compound annual rate over that period.

That growing stream of dividend income has really added up over the years. For example, an investor who purchased 100 shares of Realty Income at the end of 2013 would have invested $3,730 into the stock. They would have received a cumulative $3,077 in dividends by the end of the third quarter. That's 82% of their original investment paid back in a little more than a decade. Meanwhile, their current annual dividend income stream would be $308, a 40% increase from the $219 of dividend income they would have collected their first year. Their yield on cost has grown from 5.9% when they initially bought shares to 8.2%.

Realty Income's dividend yield is currently over 6%, due in part to the roughly 18% decline in its share price from its recent peak. That high-yielding payout (the S&P 500's dividend yield is around 1.2%) is on a very sustainable foundation. The REIT has a conservative dividend payout ratio (around 75% of its adjusted funds from operations). It also has one of the strongest balance sheets in the REIT sector (it's one of eight REITs with two A3/A- credit ratings or better). Those factors give it significant financial flexibility to continue paying dividends.

A massive and growing market opportunity

Realty Income has grown into the seventh-largest global REIT. It owns about $58 billion of commercial real estate across eight countries (U.S. and Europe). Its portfolio spans retail (79.4% of its annual base rent), industrial (14.6%), casinos (3.2%), and other properties like data centers (2.8%) leased to many of the world's leading companies.

While it's already one of the largest REITs, Realty Income owns a tiny sliver of the total addressable market opportunity for net lease real estate. It estimates the value of the opportunity to be $5.4 trillion in the U.S. and $8.5 trillion in Europe.

Realty Income has enhanced its ability to capture this vast opportunity by increasing its scale and expanding into new investment verticals. For example, it has invested in data center developments and casino properties in recent years, adding $700 billion to its U.S. market opportunity. Meanwhile, it has expanded into several additional European countries, increasing its opportunity set by $5.9 trillion. It has also added a credit investment platform and is launching a private capital fund management platform. Tapping the private capital market opens the door to an $18.8 trillion pool of potential investors.

The REIT has the financial strength and opportunity set to continue growing at a solid rate. It has grown its adjusted funds from operations per share by a 5% compound annual rate since 1995 (and an even faster 6% pace since 2012, driven by its larger-scale business). Given its financial flexibility, market opportunity, and recently launched private capital management business, it should be able to continue growing at around a mid-single-digit rate in the future.

That growth has created additional value for investors. Add it to the income stream, and Realty Income has delivered an average annual total return of 14.1% since its public market listing in 1994.

Income and more

Realty Income has been a phenomenal investment over the long term. It currently offers investors a very attractive yield and value proposition. That's why it's my top choice in the sector to buy this year for those seeking passive income. It should provide steadily rising income with the potential of delivering above-average total returns over the long haul.

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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.