There are many concerns that the global economy is barreling toward a recession. That could have a major impact on corporate earnings, forcing companies to cut expenses to conserve cash, like pausing or reducing their dividend payments. This potential impact likely has income-focused investors on edge since a recession could affect their dividend income.
However, many companies pay dividends that can endure a recession. Federal Realty Investment Trust (FRT 0.71%) has proven the durability of its dividend over the years. The REIT's payout has continued rising through the last eight recessions.
An extremely durable dividend
Federal Realty Investment Trust started paying dividends in 1967. Since then, the U.S. economy has experienced eight recessions, according to the National Bureau of Economic Research:
- 1970: A relatively mild 11-month recession occurred in 1970.
- 1973-1975: A 16-month recession followed an oil embargo by OPEC and wage-price control actions taken by the Nixon administration.
- 1980-1982: The economy experienced two recessions in the early 1980s, primarily driven by the Federal Reserve as it raised interest rates to combat high inflation. The first lasted six months, followed by a second lasting 16 months.
- 1990-1991: A nine-month recession occurred following Iraq's invasion of Kuwait.
- 2001: An eight-month recession occurred following the dot.com bust.
- 2008-2009: At 18 months, the Great Recession caused by the Financial Crisis was the longest prolonged downturn since the Great Depression.
- 2020: The COVID-19 pandemic caused a steep yet brief recession in 2020.
Many companies suspended or reduced their dividend payments each time there was a recession, with some cutting their payouts multiple times.
However, Federal Realty Trust's dividend payment has more than endured each recession. The REIT has continued to increase its dividend throughout each downturn. It currently has an unbroken streak of 55 consecutive years of dividend growth. That's the longest streak in the REIT sector and puts it in the elite group of Dividend Kings, companies with 50 or more years of consecutive annual dividend increases. The company has grown its dividend at a 7% compound annual rate during that more than half-century period.
What's driving the recession-resistant dividend?
Given its focus on the economically sensitive retail sector, Federal Realty Income Trust's ability to continue growing its dividend throughout the economic cycle might be a little surprising. The company owns over 100 retail properties.
However, these aren't any retail locations. Federal Realty has a very narrow strategic focus on owning properties in the first-ring suburbs of nine of the country's top metro markets. These areas are highly affluent and have limited space for competing retail properties. The company owns top-quality properties in these top suburban areas, which draw high-quality retail tenants.
Federal Realty Investment Trust's quality-focused strategy has helped drive resilient growth throughout the economic cycle:
Image source: Federal Realty Investment Trust.
As that slide shows, the company's funds from operations (FFO) per share has more than doubled since 2005 despite two severe recessions during that period. It has vastly outperformed other retail REITs during this turbulent time.
Another factor driving the durability of its dividend is the REIT's strong balance sheet. Federal Realty Trust has an excellent bond rating of BBB+/Baa1. That gives it more access to lower-cost capital to fund growth-related investments. The REIT also has a reasonable dividend payout ratio (67% of FFO in 2023), enabling it to retain cash to finance growth and maintain a strong financial profile.
The REIT routinely acquires additional properties in its markets as opportunities arise. It also invests capital in developing new properties and redeveloping existing ones. For example, it's investing over $550 million to transform some of its retail locations into mixed-use properties featuring retail, office, hospitality, and multifamily components. These investments have helped diversify its income stream as 12% of its rent comes from office tenants, 12% from residential tenants, and the rest from various retailers. It also spends money to redevelop aging retail properties to attract new tenants and grow its rental income.
Focused on getting better, not necessarily bigger
Federal Realty's investment strategy has paid big dividends over the years. The REIT focuses on making investments that increase its income, enabling it to grow throughout the economic cycle. It's in a strong position to weather the next economic storm thanks to its high-quality portfolio and financial profile. These features make it a safe dividend stock for investors seeking shelter from a potential recession in the coming months.
