NNN REIT (NNN -0.54%) recently hit another dividend milestone: The real estate investment trust (REIT) delivered its 35th consecutive annual payout hike. That put it in an elite group. Only two other REITs and fewer than 80 publicly traded companies currently have dividend-hiking streaks of 35 or more years.

The retail REIT's 3% dividend increase pushed its yield closer to 5%, putting it even further above the S&P 500's sub-1.5% average yield. Here's a look at what has helped drive its dividend higher and how likely NNN will be to be able to keep the streak going.

A simple strategy

NNN REIT has a simple investment strategy. It focuses on owning single-tenant net lease retail properties. Net leases -- aka, NNN leases (hence its name) -- produce predictable income for the lessor because the tenant covers all operating costs, including routine maintenance, building insurance, and real estate taxes. NNN REIT signs long-term leases (10- to 20-year initial terms) with high-quality national and regional retailers.

It owns a well-diversified portfolio by tenant and sector (nearly 3,550 properties across 49 states leased to 375 tenants in over 35 lines of trade). Its top lines of trade are:

  • Auto service (16.7% of its annual base rent).
  • Convenience stores (16.2%).
  • Restaurants (limited service is 8.5% and full service is 8.6%).

This lease structure and tenant base combination produces reliable income with low volatility.

The percentage of its cash flow that NNN REIT distributes to investors via dividends is fairly conservative. It expects its adjusted funds from operations (FFO) to be in the range of $3.31 per share to $3.37 per share this year. With its new annual dividend at $2.32 per share, its payout ratio is around 70%. That gives it a nice cushion, allowing it to retain a meaningful percentage of its cash flow to purchase new properties. The company's strong investment-grade balance sheet provides additional financial flexibility.

Room to grow

NNN REIT has two levers it can use to drive growth: rent increases and acquisitions. Most NNN leases contain some form of lease rate escalation clause that typically raises rents at a low-single-digit rate annually. That embedded rent growth provides a solid foundation for dividend increases.

In addition, NNN REIT buys hundreds of millions of dollars in properties each year. Its investment volume has averaged more than $800 million over the last two years. It primarily secures new investment opportunities via existing tenant relationships. (Since 2007, 72% of its deal volume has been relationship-based.) It will often buy additional properties from existing tenants in sale-leaseback transactions. It also buys properties through market sales and auctions (28% of its deal volume). It typically gets a better deal when it acquires properties through an existing relationship (7.5% average cap rate compared to 7.3% for market/auction deals).

Given its strong balance sheet and extensive relationships with tenants, NNN REIT should have no trouble continuing to expand its real estate portfolio. It spent $235 million to acquire 36 properties through the first half of this year. It also routinely sells properties to recycle capital into higher-returning new opportunities. It sold 20 properties for $85.8 million in the first half of 2024 for a $22.4 million gain. The REIT's growing portfolio should increase its cash flow, allowing it to continue raising the dividend.

An ideal income investment

NNN REIT is an elite dividend stock. It offers a high dividend yield and has an excellent record of increasing its payout. Given its stable portfolio and rock-solid financial profile, the REIT should have no trouble continuing to increase its dividend. Those factors make it a great stock to buy and hold for a potential lifetime of steadily growing passive income from real estate.