Several of my friends and family members own or have owned rental properties. It can be a great way to generate passive income. However, one common complaint that I’ve heard from them is that the income they make isn’t nearly as passive as they’d like. Headaches of owning rental properties include dealing with difficult tenants and unexpected repair costs.

Using an experienced property manager can help. The catch is that doing so eats into how much you make.

I have another idea, though: Skip buying a rental property and instead buy high-yield, high-quality dividend stocks. Investing $90,000 in these three stocks could make you over $7,000 in annual passive income.

1. Realty Income

If you like the idea of owning real estate without any hassles, consider buying shares of Realty Income (O 0.82%). This real estate investment trust (REIT) owns over 15,600 properties spread across all 50 U.S. states, plus the U.K. and six other European countries.

REITs must return at least 90% of their profits to shareholders as dividends to be exempt from federal income taxes. Realty Income pays a monthly dividend with a forward yield of 5.67%. A $30,000 stake (one-third of the $90,000) invested in the stock would generate roughly $1,701 in income on an annual basis at this level.

There’s an excellent chance you could make even more passive income in the future by investing in Realty Income, though. The REIT has increased its dividend for 30 consecutive years. I fully expect this streak will continue.

Wondering what kind of real estate you’d partially own if you were a Realty Income shareholder? Think convenience stores, grocery stores, discount stores, home improvement retailers, restaurants, and more. No client makes up more than 3.5% of Realty Income’s total annual rent.

2. Ares Capital

You don’t have to limit yourself to real estate to enjoy steady and dependable income, though. Ares Capital (ARCC -1.25%), the largest publicly traded business development company (BDC), pays a forward dividend yield of 8.6%. Another $30,000 invested in Ares would generate $2,580 in annual passive income.

BDCs typically provide financing to middle-market businesses with annual revenue ranging between $10 million and $1 billion. This is a growing market, as these clients seek the reliability and speedy execution that BDCs such as Ares Capital offer.

Ares Capital’s investment portfolio includes 550 companies representing a wide range of industries. Its largest investment makes up only around 2% of the total portfolio. The company continually monitors its portfolio to spot any trouble signs as early as possible. As a result, Ares Capital’s annual loss rate is much lower than the industry average.

I’m especially impressed by Ares Capital’s track record. The company went public in 2004. Since then, it has delivered a cumulative total return that’s 70% higher than the S&P 500 (^GSPC -1.97%).

3. Blackstone Secured Lending Fund

If you find Ares Capital intriguing, you might also like Blackstone Secured Lending Fund (BXSL -0.99%). It’s also a BDC, but has the financial backing of Blackstone, the world’s largest alternative asset manager, with a whopping $1.1 trillion in assets under management.

Blackstone Secured Lending Fund offers a juicy forward dividend yield of 9.25%. At that level, an investment of $30,000 would generate $2,775 in annual income. This brings total annual passive income from investing $90,000 in the three stocks on the list to $7,056.

In the fourth quarter of 2024, Blackstone Secured Lending Fund boasted the highest earnings quality and credit quality of any publicly traded BDC. It also had among the lowest expenses in the BDC industry.

I also like that 98% of Blackstone Secured Lending Fund’s investments are first-lien, senior secured debt. First lien means that the BDC will be at the top of the list in recovering its money if a client goes bankrupt. Secured debt is backed by collateral, which reduces (although it doesn’t eliminate) Blackstone Secured Lending Fund’s risk.