Dividend stocks can be an excellent source of passive income. One thing investors like to see when investing in these stocks is a company that consistently raises its dividend payout. An ever-increasing dividend payment can be a good sign of a steady business and strong capital management. However, these dividend payments could be covering up an ugly truth: subpar investment performance.
Federal Realty Investment Trust (FRT -0.37%) is a real estate investment trust (REIT) that has raised its dividend payment for 56 consecutive years. While it has been a reliable dividend stock, it has dramatically underperformed the S&P 500, especially in recent years. Before buying a stock because of its lengthy dividend payout, here's what we can learn from Federal Realty.
It has raised its dividend payment annually for five decades
Federal Realty is a REIT, which means it is legally required to pay out 90% of its taxable income to shareholders in the form of dividends, which is why income investors love investing in these kinds of stocks. These stocks tend to have above-average dividend yields and can be an excellent source of passive income from real estate without huge upfront investments.
The REIT delivers investors a 4.47% dividend yield by investing in retail and other mixed-use properties. It is highly selective about where it invests its money, focusing on regions close to major city centers in metropolitan markets. Beyond that, it chooses areas with high barriers to entry, high average household incomes, and dense populations.
Federal Realty aims to make its business more resilient by focusing on high-earners and densely populated areas that can better withstand economic downturns. This resilience is a big reason the REIT has delivered investors a solid dividend payout that has increased yearly for 56 consecutive years.
Analyzing Federal Realty's total returns in recent years
Despite its growing dividend, Federal Realty hasn't performed well for investors in recent years. Prior to 2016, Federal Realty was a solid performer. For example, from 2010 to 2016, the stock delivered total returns (including reinvested dividends) of 157% compared to 107% in the S&P 500 index.
However, since 2016, Federal Realty's returns have been nonexistent. Since then, the REIT has had a total return of -13% while the S&P 500 has risen another 152%.
FRT Total Return Level data by YCharts.
These struggles don't appear to be unique to Federal Realty. Over the same period, peers Regency Centers, Kimco Realty, and SITE Centers have also provided subpar returns of 22%, 1%, and -28%, respectively.
A few factors have impacted retail REITs since 2016. For one, the retail industry has undergone a transformation that some call the "retail apocalypse." There was an oversupply of retail space. That, combined with the growth of e-commerce retailers like Amazon, put downward pressure on rents. While Federal Realty is well positioned in resilient areas, it isn't immune from these effects.
In addition, these companies have dealt with rising interest rates and the effects of the pandemic, which fast-forwarded the closure of numerous retailers amid economic shutdowns to stop the spread of the virus.
Use this as a lesson in dividend investing
Companies that consistently grow their dividend payments can be solid investments for income investors. With that said, you have to consider the total returns of the investment over time. A company could have a nice payout, like Federal Realty, and its 4.47% yield. While it could be a good dividend stock for your portfolio because of its consistent payouts, if the stock price loses value simultaneously, you may not achieve the investment results you hoped for.
It's important to remember that past performance isn't indicative of future results. However, Federal Realty is a good example of why it's a good idea to dig a little deeper into the industry and look past an attractive yield and long history of payouts when determining if a dividend stock is worth investing in.
