Investors' efforts this year to adjust their portfolios to account for rising interest rates helped dividend stocks outperform the S&P 500 over the last year. It helps those dividend-paying companies usually have steady cash flows and manage their risk and capital well. One high-quality dividend payer, Federal Realty Investment Trust (FRT 0.20%), saw its stock price jump 19.7% in the last two months as more investors move their money around over concerns about a recession.
Despite that jump, it's not too late to add Federal Realty stock to your portfolio.
Federal Realty leases to some well-known retailers
Quite simply, Federal Realty Investment Trust provides investors with a way to invest in real estate without requiring substantial upfront investments. It's a real estate investment trust (REIT), so it pools investors' money together to buy properties to develop and then lease out to companies at profit-making rates. The secret to its success is that it is very selective about the properties it invests in.
It focuses on acquiring and developing retail and other mixed-use properties and leasing space in them to well-recognized companies. Its properties include open-air shopping centers, apartment buildings, and office space, and its major tenants include TJ Maxx, Home Depot, CVS, Kroger, and Amazon's Whole Foods.
The REIT invests in select first-ring suburbs and communities close to city centers, focusing on metropolitan areas with high barriers to entry. That gives it an advantage because competitors will find it harder to develop in these regions. It also selects first-ring suburbs with characteristics that make them less vulnerable to economic shocks. These are highly populated communities, with average population totals of 177,000 within three miles.
It focuses on affluent neighborhoods where the average income of households within three miles of its properties is $151,000. During times of high inflation and recessions, incomes matter. High-income households can be expected to absorb the impacts and ride out economic storms better.
Federal Realty (FRT) properties are generally located in areas with much higher median household incomes and increased population density that its competitors, including Brixmore Property Group (BRX), Kimco Realty (KIM), Kite Realty Group (KRG), and Regency Centers (REG). Image source: Federal Realty Investment Trust.
Why it has been able to consistently raise its dividends
Federal tax law requires that it (like all REITs) pay out 90% of its taxable income to shareholders via dividends every year. That feature makes Federal Realty (and most other REITs) a good source of passive income.
Federal Realty has increased its dividend payout annually for 55 consecutive years, a feat that few companies have ever accomplished.
Being so consistent in raising its dividend over five decades helped earn Federal Realty membership in the exclusive group of stocks known as Dividend Kings. The company has done a stellar job of managing its cash and business risks, and it positioned its properties in a way that makes it less vulnerable to weakening economic conditions.
How Federal Realty manages its risk
Like any real estate investor, Federal Realty faces the risk that tenants won't keep up with rental payments. If inflation becomes too onerous or a bad recession hits the U.S., tenants could have a hard time.
Federal Realty has mitigated some of that risk by diversifying its real estate portfolio across industries and companies. No individual tenant accounts for more than 2.8% of its annual base rent. Meanwhile, 16% of its tenants operate restaurants, 13% occupy residential properties, and 12% are leasing office space.
Investors may have concerns about Federal Realty's debt. That's because REITs tend to operate with more debt than other companies. Federal Realty has about $4.3 billion in debt, 87% of which is fixed-rate. That type of debt matters because it's less vulnerable to rising interest rates -- which could cause headaches for borrowers with floating-rate debt. It has a net-debt-to-EBITDA (earnings before interest, taxes, deductions, and amortization) ratio of around 6, and its bonds are investment-grade rated by major rating agencies. Based on all that, it can be considered a safe, high-quality REIT.
Don't miss out on this Dividend King
Federal Realty has weathered numerous economic storms over the past 55 years. Its focus on high-traffic properties near high-income neighborhoods should help it withstand a downturn better than its peers. With its history of growing payouts and a dividend that yields about 4% at the current share price, Federal Realty is one powerhouse dividend stock you can confidently buy today.
