It's not easy for companies to pay dividends every year -- and even harder to keep increasing them. Out of the thousands of public companies in the stock market, just 129 have done it for 25 years or longer.
But REIT Federal Realty Investment Trust (FRT -0.51%) takes it a step further: It's raised its dividend for 54 years and running, making it a Dividend King. This real estate company is one of the best dividend stocks you can own.
Federal Realty's success is no accident, and understanding how the company keeps growing its payout can help you learn about dividend stocks in general. Here are the three keys to Federal Realty's dividend excellence.
Strategic real estate portfolio
Federal Realty Investment Trust is a real estate investment trust (REIT), a particular type of business that acquires and rents real estate. It's structured to pay out at least 90% of its taxable income as dividends, making REITs great income-producing stocks for investors.
Whether you're a landlord or a real estate business, collecting rent is your top priority, and Federal Realty has strategically built its portfolio around this. The company focuses on mixed-use open-air retail properties in the suburbs of major cities in the United States.
Federal Realty focuses here because these areas have dense populations with above-average income levels; in other words, tenants are likely to do well, which means they can pay their rent. More than 75% of its properties have a grocery component, so traffic in these properties is pretty resilient, thriving in most economic conditions.
Federal Realty rents to a broad base of roughly 3,000 tenants, getting no more than 2.8% of rental income from a single tenant. Its largest tenants include deep-pocketed companies like Whole Foods (part of Amazon); The Home Depot; and Kroger.
Steady, consistent growth
REITs distribute most of their taxable income as dividends, so the company reports funds from operations (FFO) instead, which is the cash that the business generates, similar to cash flow; it's real cash that pays for a REIT's dividend. The chart shows the growth of this metric.
Federal Realty isn't a high-growth business, growing funds from operations at a mid-single-digit rate in a typical year. The company makes strategic acquisitions to expand its property portfolio; it's increased from 85 real estate projects in 2010 to 105 today. It will also sign long-term leases with built-in escalators to keep pace with inflation. Federal Realty may not grow quickly, but its growth has proven steady.
It took an apocalyptic type of scenario to put a significant dent in Federal Realty's business when the pandemic caused its rental income to drop 11% year over year in 2020.
Despite a nearly unprecedented disruption to the business, Federal Realty held firm, keeping its dividend growth streak intact. What's more, its strong balance sheet helped the company handle the pandemic quite well.
The balance sheet carries an A- credit rating from S&P, which is investment-grade. It has $1.3 billion in cash and unused credit to draw from, which is more than its entire rental income for all of 2021. Having so many financial resources at hand makes for a great safety net it can lean on during challenging or even "black swan" events like the pandemic was.
The company just wrapped up its 2021 fiscal year, seeing $435 million in funds from operations or $5.57 per share, a 27% increase over 2020 as it recovers from COVID-19. The company hasn't yet recovered to pre-pandemic levels, but 2021 occupancy was at 91% in December, and Federal Realty collected 97% of billed rents in the fourth quarter of 2021, so it looks like the worst is over.
Federal Realty pays a quarterly dividend totaling $4.28 per share. Even though FFO is still recovering, the dividend payout ratio is still easily affordable at 77% of the company's full-2021 FFO per share.
The blueprint for dividend growth
Federal Realty probably isn't going to make you rich overnight, but when it comes to generating steady income, it's one of the best stocks out there. Its 3.4% dividend yield beats the interest on your typical savings account, and you can feel pretty sure that the payout will keep growing over time.
When a company has a sound strategy, executes on it, and maintains a disciplined approach with its financials, the results can be great for shareholders. Federal Realty Investment Trust is a prime example of that.