Real Estate Investment Trusts (REITs) are a great business model for retail dividend investors. These companies are professional landlords, leasing out real estate and distributing most of the profits to shareholders as dividends.
There are many real estate types, and REITs will often focus on a specific category for their business. Retail is one of the most common, and the companies that excel can anchor a long-term portfolio.
Here are two retail REITs that are as fundamentally sound as they come. Not only do they have steady track records of paying a dividend, but they have enough growth to generate strong total investment returns.
1. Realty Income
Calling itself "the monthly dividend company," Realty Income (O 1.24%) is famous among dividend investors for the monthly dividend it pays. That's a lot more frequent than the traditional quarterly dividend, which is paid every three months. Realty Income is a REIT specializing in renting commercial properties to single-tenant owners and other businesses.
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The company owns roughly 11,136 commercial properties that it rents to more than 1,000 customers. Realty Income's typical tenants are blue-chip companies and resilient in most economic conditions; these include specialty retail, convenience shops, movie theaters, fitness centers, and more. The company has operations in the United States and Europe, and management estimates that it has a $12 trillion addressable market.
But opportunity alone isn't enough to thrive over the long term; a business needs to execute at a high level. REITs grow primarily by acquiring new properties, so a strong balance sheet is essential. Realty Income's balance sheet carries an A- rating from Standard & Poor's, or "investment grade," and a strong credit rating for a REIT. This is a testament to management, which must fund acquisitions either by borrowing money or raising it by issuing new stock.
REITs measure success based on the cash profits they generate, often called funds from operations (FFO). Realty Income's FFO-per-share has grown 5.1% per year, on average, since the company went public in the mid-1990s. This steady growth helps power the company's dividend, which yields 4.1% and has increased each year since the company went public 28 years ago -- making it a Dividend Aristocrat. The stock's total investment returns have averaged 15% annually since 1995, showing what a high-yield dividend and consistent growth can do for a stock.
2. Federal Realty Investment Trust
Retail REIT Federal Realty Investment Trust (FRT 1.62%) is more than a Dividend Aristocrat; it's a Dividend King that's raised its payout for the past 54 years. While it is also a retail REIT, Federal Realty uses a different strategy than Realty Income. It focuses on open-air shopping properties, owning 104 of them that serve more than 3,100 tenants, both commercial and residential.
You'll find Federal Realty's properties near major metropolitan markets in the United States. It operates in what it calls the "first ring" suburbs, immediately outside of the city, where there are both higher-income families and high traffic. Roughly three-quarters of Federal Realty's properties have a grocery store or other food component, which helps generate shopper activity year-round.
The company boasts a strong balance sheet that, like Realty Income, also carries an A- rating from Standard & Poor's. Again, balance sheets are essential for REITs because the difference between how much management can rent a property for and the cost of the debt to finance the deal, is where the profit is for the business. A strong balance sheet is a competitive advantage that gives a REIT less expensive capital than peers with worse credit.
Federal Realty's total investment returns have averaged more than 12% annually since 2003 due to a strong dividend and steady business growth. The stock's dividend yield is currently 3.5%, and 2022 guidance for FFO per share is $5.75 to $5.95, or about 6% year-over-year growth. As long as management can continue executing profitable deals, investors seem poised for more good things from Federal Realty in the years ahead.
