I bought Federal Realty (FRT -0.37%) during the early days of the coronavirus pandemic. I ended up owning Realty Income (O -0.17%), for the second time, when it acquired VEREIT. I'm not about to sell either one of these reliable dividend stocks. But if you are looking at Federal Realty right now, retail-focused Realty Income is probably a better choice. Here's what you need to know.
1. The yield cinches the deal
Getting directly to the point, these two real estate investment trusts (REITs) have notably different dividend yields. If you are a dividend investor looking to maximize your income stream, Realty Income's yield of 5.1% is simply more attractive than Federal Realty's 4.2%.
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The yield difference isn't huge on an absolute basis. However, on a percentage basis, investing in Realty Income will increase your income stream by more than 20% relative to what you'd get from the same investment in Federal Realty. That's not an inconsequential difference if you are trying to supplement your Social Security check with dividend income.
But while this factor is likely to be the nuance that tilts the scale in favor of Realty Income, it is still just one piece of a bigger puzzle.
2. Two strong dividend histories
Federal Realty is the hands-down leader when it comes to dividend reliability. It has increased its dividend annually for 55 consecutive years, making it a Dividend King. It has the longest dividend streak in the REIT sector.
Realty Income clearly can't live up to that, since only one REIT can have the longest dividend streak. But at 29 consecutive years of annual dividend growth, it is hard to suggest that Realty Income's dividend record is anything less than impressive. And while Federal Realty is objectively better on this point, it is really just a minor issue given Realty Income's still-strong history of rewarding investors through thick and thin.
3. Neither will knock your (dividend growth) socks off
Speaking of dividends, both Realty Income and Federal Realty have annualized 10-year dividend growth rates in the mid-single percentage digits. These figures will go up and down year by year, but low- to mid-single digits is probably a reasonable expectation over time. These aren't rapid dividend growth investments. They are reliable income stocks that you can count on to form the foundation of a broader portfolio. As long as they generally keep up with the long-term historical inflation rate of about 3%, you should be happy.
4. Similarly strong finances
Speaking of foundations, both Realty Income and Federal Realty have investment-grade-rated balance sheets. Realty Income is rated A- by S&P, while Federal Realty is BBB+. This one goes to Realty Income by a nose, given that it is just one step higher on the ratings hierarchy. But really, both are financially sound enough for even conservative investors to feel comfortable with the stocks.
5. Different, but close enough, businesses
This last point is a bit harder to deal with. Federal Realty owns strip malls and mixed-use developments, which combine retail, apartment, and office assets. That said, it generates around 76% of its rents from retail properties, with 12% each from apartment and office. There's no question it is a retail REIT, but it is not exactly a pure-play retail landlord.
Realty Income generates around 76% of its rents from single-tenant retail properties. Around 15% is classified as non-retail, which is mostly industrial, and another 9% is dumped into "other," which is really a portfolio of vineyards and a casino. Once again, this is a retail REIT, but not a pure retail REIT.
Strip malls and single-tenant retail properties are different, but not so very different that you couldn't be comfortable picking Realty Income over Federal Realty. And given the other similarities, and the notably higher yield from Realty Income, the nuances of the property types here probably aren't big enough to worry about. So if a retail REIT is what you're after with Federal Realty, switching it to Realty Income shouldn't mess your portfolio up in any way.
I'd buy them both, but...
To repeat myself here, I own both of these REITs, and I'm happy about that. They are both well run and have impressive and consistent dividend histories. I don't think you would be making a mistake adding either one to your dividend portfolio. But if you had to choose just one, Realty Income would be my nod because of the higher yield. Federal Realty just isn't differentiated enough to make up for the difference in the income you'd collect by buying Realty Income.
