Investing in retail stocks comes with one unavoidable risk, since you are essentially betting that the retail concept you are buying will perform well. Retailers, however, go in and out of favor over time. Federal Realty Investment Trust (FRT -0.37%) offers an alternative route, by allowing you to buy the landlord of the properties that retailers occupy. Here's why that could be a good decision.
Investors are down on Federal Realty
Federal Realty shares have fallen roughly 30% from their highs in early 2022. That has pushed the retail-focused real estate investment trust's (REIT's) dividend yield up to around 4.4%. That's near levels last seen during the pandemic-related recession in 2020 and the Great Recession in 2008 and 2009. So, in some ways, the stock looks historically attractive today.
Backing that up is the fact that Federal Realty is a Dividend King, with over 50 years of annual dividend increases behind it. It has the longest dividend record of any REIT and is the only REIT that is a Dividend King. Very clearly, the company places a high value on returning an increasing level of cash to shareholders over time.
But REITs are income investments that compete with things like CDs and bonds. As interest rates rise, increasing CD and bond yields, investors often switch from REITs toward income investments that are perceived as safer. Federal Realty's stock drop is largely related to this fact, not weakening business performance.
The argument to buy Federal Realty
You can most certainly find higher-yielding REITs, but you can't find a REIT with a better dividend track record. And, as noted, the yield looks fairly attractive relative to recent history.
Here's another thing to consider: If you buy a retail stock you have to hope that the retail concept you are backing is a long-term winner. If you buy Federal Realty, you are betting on retail in general, but the actual tenants can change. So long as Federal Realty has good properties that attract good tenants -- whoever they may be -- you still win, via a regular and growing dividend stream.
In addition to the dividend record, a second big differentiating characteristic of Federal Realty is the strength of its portfolio. The average size of the population around its properties and the average family wealth of that population are both higher than any of its closest peers. In fact, in 2020 during the pandemic, when occupancy rose throughout the retail property sector, retailers were calling Federal Realty to see if they could move into its properties. Many of these calls came from retailers with nearby locations that wanted to upgrade to a Federal Realty property. It is located where retailers want to be located.
Buying while investors are downbeat on Federal Realty stock could be a good long-term choice for dividend investors who care greatly about dividend consistency.
The argument to hold Federal Realty
If you own Federal Realty shares, particularly if you bought the stock for the income it generates, it probably doesn't make sense to sell it. The strength of its portfolio has allowed it to navigate market volatility, retail industry difficulties, and dramatic interest rate swings. Unless the portfolio suddenly becomes less desirable, this is a stock you buy and hold, perhaps forever.
The argument to sell Federal Realty
Investors worried about interest rates might be tempted to dump Federal Realty. After all, you can lock in a similar level of income with a CD. That is true and might be appropriate for someone with a short-term investment horizon. But eventually that CD will mature and then you have to hope you can find an equal or higher yield. So such a switch comes with its own set of risks. And that doesn't even consider the fact that CDs don't offer annual dividend growth, as Federal Realty has for more than five decades. For long-term investors, selling now seems like a mistake.
Federal Realty is a buy (or a hold if you own it)
All in, Federal Realty is probably worth buying today for conservative long-term income investors who care greatly about creating a consistent income stream. If you own it for that reason, meanwhile, selling it would likely be a mistake. That said, no investment is perfect and that is as true of Federal Realty as any other company. A further rise in interest rates could put additional downward pressure on the stock. But that would just make the shares of this retail-related Dividend King REIT more attractive.
