Dividend stocks can be a crucial part of a balanced portfolio. However, not just any dividend stock will do.
The best dividend-paying companies have reliable cash flows and a track record of growing dividend payouts. These stocks can provide a good source of income, making them excellent for retirees.
One no-brainer dividend stock on my radar is Federal Realty Investment Trust (FRT +2.26%). The real estate company has a lot going for it, most notably its impressive, multidecade history of growing its dividend payout. Here's the secret sauce that makes this stock a solid investment.
NYSE: FRT
Key Data Points
55 consecutive years of dividend increases
Federal Realty Investment Trust operates as a real estate investment trust (REIT), giving investors an easy way to invest in real estate without needing a pile of cash upfront. REITs are legally required to pay out at least 90% of their taxable income to shareholders in dividends each year, making them an excellent source of passive income.
Federal Realty specializes in acquiring, developing, and leasing retail and mixed-use properties. This includes properties like open-air shopping centers, offices, and apartment buildings.
What makes Federal Realty stand out is its long history of raising dividends. For 55 consecutive years, Federal Realty has increased its dividend payout annually -- making it a Dividend King. Despite the inflationary decade in the 1970s, the Dot-com bubble of 2000, the Great Recession in 2008-09, and the pandemic of 2020, Federal Realty increased its payout -- a testament to its business and cash management.
Federal Realty's secret is a simple one
Federal Realty's secret sauce is an old cliché: The three most important things in real estate are location, location, and location. The company thrives because it is highly selective about where it invests in property. It strategically selected first-ring suburbs, or communities close to city centers, in nine major metro markets with high barriers to entry.
It selected these communities because they have high populations -- an average of 177,000 people are within three miles of its properties, and high average income levels -- the average income of households within three miles is $151,000. Its focus on highly populated, affluent neighborhoods makes Federal Realty more resilient during tough economic times.
Image source: Federal Realty.
Household incomes matter during times of high inflation and recessions. That's because households with higher incomes can better absorb the impacts of the two. According to the Brookings Institution, low- and middle-income households tend to be more vulnerable to high inflation, which can eat away at their incomes.
In May, Macy's CEO Jeff Gennette pointed out that at households earning $75,000, the customer was "very healthy and spending levels were strong." However, householders under $75,000 were most affected by inflation, which forced them to trade down to less expensive items. Only 10% of Federal Realty's properties are in places where the median income is $75,000 or less.
How Federal Realty manages its risk
Like any REIT investment, Federal Realty faces risks if its customers can't keep up with rental payments. One way it mitigates this risk is by spreading out its rentals across different industries and companies.
No single tenant makes up more than 2.85% of Federal Realty's annual base rent. Its tenants include familiar names, like TJ Maxx, CVS, Kroger, Whole Foods, and Home Depot, and its top 25 tenants make up 26% of its annual base rent.
Image source: Getty Images.
Another positive is that 93% of Federal Realty's debt is fixed-rate, meaning it is less vulnerable to fluctuations in interest rates which could wreak havoc for those companies with floating-rate debt.
Federal Realty is an income investor's dream
Federal Realty is a top-notch dividend stock that you can trust. The REIT has weathered various economic storms and has still managed to increase its payout for 55 years consecutively. Right now, the stock is trading down about 33.5% since the start of 2022, largely over short-term concerns about the downturn in the broader economy and rising interest rates. That makes it a bargain at the moment.
Because of its focus on high-traffic, high-income neighborhoods, Federal Realty should be able to withstand a downturn better than its peers. Its history of dividend increases and 4.68% dividend yield make this stock a no-brainer you can add to your portfolio today.
