Generating passive income is a big part of my investment strategy. My goal is to eventually make enough passive income each month to offset all my family's regular expenses. That would give me and my wife more flexibility, in terms of finances and our time.
My core strategy is investing in higher-yielding dividend stocks that steadily increase their payouts. Vici Properties (VICI -1.86%) certainly fits the bill. Here's why I recently bought more shares of the real estate investment trust (REIT), my third purchase in the past two months, and will probably continue doing so in the coming months.
Vici's high-yield dividend is a low-risk wager
Vici Properties' dividend yield is currently over 5.9%. That's well above the S&P 500's 1.2% yield. It's approaching the highest level over the past five years, partly because of the roughly 8% decline in its stock price over the past year and its 14%-plus slump from its recent high.
The REIT's high-yielding payout is on a very firm foundation. One factor driving that view is the overall stability of its rental income, thanks to its high-quality real estate portfolio. Vici Properties owns 54 gaming properties and 39 other experiential properties across the U.S. and Canada leased to high-quality operators under long-term triple net (NNN) agreements. Its properties are crucial to the operations of its tenants, which is why it has continued to collect 100% of its contractual rent.
Vici Properties pays out about 75% of its adjusted funds from operations (FFO) in dividends. That gives it a big cushion while allowing it to retain cash to help fund new investments. Vici Properties also has a solid investment-grade balance sheet, giving it additional financial flexibility.
Plenty of room to continue growing
Vici Properties has increased its dividend every year since it came public; 2024 was its seventh in a row. Last year, it gave investors a 4.2% raise and has grown its payout at a 7% annual rate since coming public, well above the 2.2% average of other REITs focused on owning NNN real estate.
The REIT is in a strong position to continue growing its payout in the future. One growth driver is rental increases. About 40% of its leases currently escalate rents at a rate tied to inflation. Given its current lease structures, that percentage will increase to 90% by 2035. As a result, rents should rise at a low-single-digit rate each year.
Acquisitions are an even bigger growth driver for the REIT. It has made many deals over the years, enabling it to grow into the world's leading gaming and experiential REIT. It owns several iconic casinos along the Las Vegas Strip and elsewhere, including 15 states and one Canadian province. The REIT also owns 38 bowling entertainment centers and Chelsea Piers in New York City.
While it's already a leader in owning experiential real estate, Vici Properties has many ways to continue expanding. For example, it has option agreements or the right of first refusal to buy several more gaming properties from its existing tenants. It can also buy gaming properties from new operators as opportunities arise.
It also has long-term financing agreements with several experiential property developers to fund new properties that it can acquire from those partners in the future. For example, last year, it agreed to provide a construction loan of up to $105 million to Homefield Kansas City to fund the development of a Margaritaville Resort in Kansas City. As part of the agreement, Vici Properties received options to buy that property, a new Homefield youth sports training facility, a new Homefield baseball center, and an existing Homefield youth sports complex. The REIT has similar financing partnerships with CanyonRanch, which specializes in wellness resorts; Cabot, for destination golf; and others.
Vici Properties will also provide capital to its tenants to fund improvements at its existing properties. Last year, it agreed to provide The Venetian Resort Las Vegas with up to $700 million to renovate hotel rooms, optimize the gaming floor, and make entertainment and conference center enhancements. The REIT will recoup this investment with a higher rental rate on the property.
The REIT has the financial capacity to continue expanding its portfolio as opportunities arise. Those new investments will grow its income, enabling it to continue increasing its dividend.
A low-risk, high-yield income stock
Vici Properties currently offers a very attractive dividend yield, thanks to its steady growth and the decline in its stock price over the past year. The REIT should be able to continue growing its payout in the future as it expands its portfolio. It should help me achieve my passive income goal faster, which is why I can't stop buying shares these days.
