I’m on vacation this week. Today, Josh Arnold of Sure Dividend is filling in for me with some insight on REITs and passive income. I’ll be back later this week with an article of my own.

For many, achieving sustainable passive income is the goal after a lifetime of saving and investing. After all, the measure of when one can stop working is often when their passive income can substitute for earned income. That makes it critical that investors are able to save and invest, but when the time comes to generate passive income, it is also critical to choose the right stocks for the highest chance of success.

Real Estate Investment Trusts, or REITs, are a group of stocks that either own physical property that is leased out, or financial instruments related to physical property, such as mortgage-backed securities. REITs exist mostly as pass-through vehicles where most of the earnings of the trust are distributed to shareholders, so dividend yields tend to be quite high for the sector. That is why they are so attractive as income, and why we like them for producing passive income.

In this article, we will examine 3 top REITs that offer investors safe, passive income.

Realty Income Corporation (O)

Our first stock is Realty Income, which bills itself as the Monthly Dividend Company. Realty is so named because it’s famous for having paid common stock monthly dividends throughout the past fifty years, an astounding feat. Realty Income sets itself apart from traditional stocks that pay quarterly dividends, because monthly dividends not only allow for faster compounding, but for those using dividends for income, monthly provides regular inflows rather than large lumps of dividends every three months. For passive income generation, monthly is far superior.

Realty Income owns more than 6,500 properties that it leases under long-term agreements to commercial clients. The trust focuses on standalone retail properties, not malls or shopping centers, as it has proven during its 50+ years of operating that it can generate superior returns via this strategy.

Realty Income has boosted its dividend more than 100 times since going public in 1994, as the trust tends to opt for a few, incremental boosts of the payout during the year, rather than one large increase annually. Realty Income has scale as well, generating more than $3 billion in annual revenue, and trading for a market capitalization of $40 billion.

Apart from paying the dividend monthly instead of quarterly, we like Realty Income for its current yield, its safe payout, and its dividend growth potential. The current yield is 4.4%, which is more than triple that of the S&P 500, so on a pure income basis, Realty Income checks the box. That’s even more so the case when you consider it’s paid monthly rather than quarterly. In addition, Realty Income has raised its dividend for 26 consecutive years.

Realty Income’s payout ratio is also quite reasonable, coming in at just 75% for this year. As REITs are required to pay out substantially all of their earnings as dividends, payout ratios in the sector tend to be quite high. Given that, we see Realty Income’s payout ratio as quite sustainable, and with good room for future growth. We forecast 4% annual growth in FFO-per-share and similar gains in the dividend as a result.

STAG Industrial, Inc. (STAG)

Our next stock is STAG Industrial, a REIT that is focused on the acquisition and operation of single-tenant industrial properties in the US. The trust targets properties that have wide moats by focusing on industrial properties that support e-commerce businesses, for instance. This strategy has generated a strong mix of income and growth for STAG’s history as a public company, and we believe it to be well-positioned for years to come through this strategy.

STAG produces about $650 million in annual revenue and trades with a market capitalization of $7.2 billion. The trust sports an 11-year dividend increase streak, as it has raised its dividend every year since going public.

STAG’s payout ratio is outstanding for a REIT, coming in at just 66% for this year. That leaves ample room for both safety and dividend increases, consistent with the trust’s past. The yield is also robust at 3.7%, about triple that of the broader market, and like Realty Income, it is paid monthly rather than quarterly.

We project 5% annual FFO-per-share growth for STAG, providing long-term dividend increase potential that is stronger than most REITs, which tend to be low-growth stocks.

Essex Property Trust, Inc. (ESS)

Our final stock is Essex Property Trust, a REIT that focuses on acquiring, developing, and managing multifamily residential properties in the West Coast markets of the US. The trust focuses on high-quality apartment communities it believes are in areas with strong growth, and currently owns about 250 different communities consisting of about 60,000 units.

Essex generates $1.5 billion in annual revenue and trades with a $23 billion market capitalization, so it is also quite sizable.

Essex has boosted its dividend for 27 years consecutively, making it a very strong income stock. It pays its dividends quarterly, and the current yield is 2.6%, about double that of the S&P 500. However, we like Essex because it owns properties in desirable markets with favorable long-term demographic trends and a very safe dividend.

The payout ratio for this year is expected to be just 60%, making Essex’s dividend safety top-tier among REITs. The trust has produced strong growth for most of its operating history, and we think that will continue in the years to come, particularly as the current housing market makes it less affordable to buy a home. That leads to rent price growth for Essex and other apartment owners.

We see 1.5% FFO-per-share growth as our base case, with upside potential depending upon housing market price growth.

Final Thoughts

While there are many ways to generate passive income in retirement, we find REITs to be a very attractive choice. Two of the stocks we’ve looked at here offer monthly dividends, rather than quarterly, providing shareholders more frequent income. In addition, they all offer market-beating yields and very strong dividend safety prospects. Finally, all three have good track records of raising their dividends, even during recessions, so overall, Realty, STAG, and Essex offer investors a great mix of yield, safety, and growth potential for passive income.