The days of investors getting a risk-free 5% yield are coming to an end. The Federal Reserve raised the benchmark interest rate from 0.25% in early 2022 to 5.5% in July 2023 to tamp down inflation. As a result, certificates of deposit (CDs), Treasuries, and even high-yield savings accounts were terrific passive income vehicles.
However, with inflation back near 2.5%, the Fed lowered interest rates by 0.5% in September, and the market expects several more cuts in 2024 and 2025. It's time to start thinking of other ways to generate quality income. Real estate investment trust (REIT) Vici Properties (VICI -0.65%) is an excellent choice. Here's why.
What is Vici Properties?
It pays to be unique in the world of real estate. Office buildings and strip malls generate income for landlords, but they are easy to replicate, and competition is fierce. These properties are also sensitive to economic downturns and remote work trends. Office buildings especially suffered during and coming out of the pandemic. However, Vici collected 100% of the rent during the height of COVID-19, illustrating just how resilient its cash flow is.
Vici owns some of the world's most recognizable experiential properties. In Las Vegas, it holds the MGM Grand, The Venetian, Mandalay Bay, and several others while holding other trophy properties across 26 states. Collecting 100% of the rent when many casino resorts, including the entire Las Vegas Strip, shut down shows the importance of unique properties with well-financed tenants like Caesars Entertainment and MGM Resorts International.
Las Vegas is booming. In 2023, it set records for gaming revenue and airline passengers, and is among the fastest-growing metro areas in the country. Gaming revenue slowed modestly in 2024, but this shouldn't concern Vici investors, given the track record.
The drawback of high-profile properties is that they are in limited supply. Vici needs other ways to grow from here. Providing financing to existing tenants for expansion is one way Vici is doing this. For instance, Vici invests in a tenant to expand facilities, then collects more rent from the larger space. It's great for both parties because the tenant also increases revenue from the addition.
Another way Vici grows is through diversification. It is purchasing lodges, golf courses, and waterparks, and eyeing expansion into college and pro sports.
The numbers say "buy"
Vici's dividend has increased yearly since its formation at a compound annual growth rate of 7%, and the current yield is higher than average, as shown below.
VICI Dividend Yield data by YCharts
Other critical measures for real estate investment trusts are funds from operations (FFO), which measures operating cash generation, and the payout ratio, which measures the percentage of earnings paid out in dividends. The lower the payout ratio, the safer the dividend. Both metrics are positive for Vici:
VICI Funds from Operations (TTM) data by YCharts
As you can see, funds from operations are growing and the dividends are well covered. Yields of 5% on CDs and Treasuries may be gone, but investors have other options. Vici offers investors an over 5% yield and a steadily rising payment, making it a terrific income-producing investment.
