There is one thing that separates Federal Realty (FRT -0.37%) from every other real estate investment trust (REIT), and that is the company's dividend consistency. But investors are well aware of how reliable a dividend stock this REIT is and have placed a premium price on the shares. As you get to know the company, you have to decide how important that dividend reliability is to you -- and whether you're willing to pay up for it.
A record that is second to none
Federal Realty is a Dividend King. The REIT has increased its dividend every single year for 55 consecutive years. No other public REIT has a dividend record that impressive.
Image source: Getty Images.
It is worth taking a second to appreciate this streak. Just since the turn of the century, Federal Realty has increased its dividend through the 2000 dot-com crash, the economic turbulence of the Great Recession, and the global coronavirus pandemic. In fact, the streak actually goes all the way back to the hyperinflation of the 1970s, the oil embargo, and the drastic rise in interest rates that pushed bond yield well up into the double digits. Through multiple recessions, multiple business cycles, and political upheaval, Federal Realty has continued to reward investors with dividend increases.
Some of that can be attributed to a somewhat boring business model. Federal Realty owns strip malls and mixed-use developments. Roughly 75% of its properties include a grocery store. And it tends to favor well-located properties in wealthy regions with lots of residents nearby. Effectively, it wants to own properties that attract regular customers and retailers because of their inherent desirability. It makes sense that this approach would result in consistent performance and reliable dividends.
How much are you willing to pay?
For more conservative dividend investors, such as those looking to supplement Social Security, the consistency of Federal Realty's dividend will be very attractive. And while the 4.2% dividend yield is hardly huge, it is still relatively attractive compared to the broader market (the S&P 500's yield is around 1.4%). You could probably find a CD or bond with a similar yield, but you would be giving up the dividend growth this REIT has provided.
That's no small issue when it comes to retirement, because inflation slowly eats away the buying power of your income. While Federal Realty's annualized dividend growth rate over the past decade was only around 4%, that is enough to maintain, if not slightly grow, the buying power of the dividend relative to the historical rate of inflation growth. A CD won't provide that same level of protection to your buying power.
So for investors worried about making sure they keep getting a growing dividend check, Federal Realty could be a good investment. But the REIT's 4.2% yield is actually lower than the 4.4% yield of the average REIT (using Vanguard Real Estate Index ETF as a proxy). That suggests that investors are paying a premium for Federal Realty's impressive dividend record. There are other REITs, with strong dividend histories, that you could buy with larger yields. If you have even the slightest value focus, Federal Realty probably won't be a stock you'll gravitate toward.
Put it on the wish list
Here's one last thing about Federal Realty to keep in mind: It is basically a retail REIT. So when the retail sector is doing poorly, the company's stock is likely to be headed lower, too. That can open up opportunities to buy at more attractive prices if you just can't bring yourself to pull the trigger on a REIT yielding 4.2%.
For example, during the pandemic-driven bear market in 2020, the yield briefly jumped to more than 6%. While it might have been hard to commit to during that scary time, Federal Realty was a screaming buy for anyone who knew about the company's impressive dividend history.
