What exactly does a safe dividend look like? One example is Federal Realty (FRT -0.37%), which has increased its dividend annually for 55 years, giving it the longest streak of dividend increases in the real estate investment trust (REIT) sector. It's worth taking a moment to think about those 55 years before you dig into the REIT's actual business.
Hard times
Federal Realty is a retail REIT, which was not a great place to be for investors in 2020. In some ways it feels like forever, but just three and half years ago the world was in a state of fear because of the fast-spreading coronavirus pandemic. In an attempt to slow the spread of the illness, nonessential businesses were shut down, people were asked to work from home if possible, and social distancing was the norm. Federal Realty was having trouble collecting rent from some of its tenants, but there was one thing it didn't shy away from -- dividend increases.
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The recession associated with the coronavirus pandemic was short, but it was very difficult for retail-oriented landlords. A lot of retail REITs ended up cutting their dividends, with a few prominent mall landlords falling into bankruptcy. So Federal Realty really does stand out for its ability to keep rewarding investors with dividend growth through that very uncertain period. But it was hardly the first time.
If you go back to the 2007-to-2009 Great Recession, the story plays out very similarly. The world was worried that the financial industry was on the verge of collapse, thanks to a crashing housing market in the United States. Federal Realty didn't skip a beat; it increased the dividend again. Or look to the turn of the century, when fears abounded that computers were going to break down en masse because of a coding glitch around the way computers store dates. No worries for dividend investors with Federal Realty: It kept increasing the dividend despite a bear market and recession.
Federal Realty's dividend has been increased through high inflation, low inflation, oil embargoes, and recession after recession. Based on this impressive history, there's little reason to believe that another recession will pose any problem at all.
The key
So what sets Federal Realty apart? First and foremost, a commitment to shareholders, given that dividends are set at the whim of the board of directors. But, equally important, is the REIT's intense focus on quality.
It owns only around 100 properties, which is a pretty tiny portfolio in the retail REIT space. Instead of getting big to just get big, management buys properties only in top markets. In fact, it buys only in and around nine major metropolitan regions, typified by high incomes and densely populated towns and cities. This is important.
The average median income within three miles of a Federal Realty property is roughly $110,000. The average population density is 2,500 households per square mile. Both of those figures are well above those if its peers. Retailers want to be located around lots of wealthy people because those are the ones who spend more. In other words, Federal Realty owns properties that retailers want to be in, and that leads to strong results over time. During weak spots and economic downturns, management trusts in the strength of its portfolio, believing that demand will come back strong in short order. For example, during the pandemic, it benefited as retailers in nearby locations upgraded to better locations in a Federal Realty property.
On top of that, Federal Realty has a long history of development and redevelopment. Basically, it makes sure its properties are industry leaders by investing in them. That's something retailers are aware of, too, giving the REIT another way to draw tenants.
Slow and steady
To be fair, Federal Realty isn't going to knock your socks off with dividend growth. Over the past decade, the dividend has increased at a roughly 4% annualized rate. That outdistances historical inflation growth over time, increasing the buying power of the dividend, but only by a little bit. So the story with this 4.1% yielding REIT is "slow and steady wins the race." However, if dividend safety is what you are after, that might be exactly what you want to hear.
