With a bull market underway, inflation at bay, and interest rates expected to ratchet down a bit in the year ahead, it's easy to see why many investors might be shedding their recession fears.
But that might be premature, according to some economic indicators. The impact that a sustained downturn can have on the stock market can be a shock to both newly minted investors with a focus on growth, and those not so new who are counting on dividends to bolster their fixed-income flow, especially after retiring.
I'm in the latter group and have supplemented the Social Security benefits I draw with the regular payouts of dividend stalwarts, including Federal Realty Investment Trust (FRT -0.37%), a real estate investment trust (REIT) with a notable record for weathering economic gyrations.
Different recessions. Same result
There have been seven U.S. recessions since Federal Realty was founded in 1962, according to the National Bureau of Economic Research. Each was different in cause, severity, and duration, but one constant to consider is that Federal Realty continued increasing its annual shareholder payouts during each of them.
That places this REIT in the exclusive company of Dividend Kings, publicly traded companies that have at least 50 straight years of dividend increases. Make that 57 straight years for Federal Realty. It's the only REIT on the list.
Like all equity REITs, Federal Realty generates cash flow from a pool of income-producing properties and is obliged to pay at least 90% of its taxable income each year to shareholders in the form of dividends. Unlike many other REITs, however, it hasn't had to cut its payouts because of tenants who suddenly were unable to pay their rent.
That's due in part to the savvy and seasoned management of a company deeply committed to dividend payouts, and to the nature of the portfolio they've built: a collection of 102 retail-based properties centered in high-income, first-ring suburbs around such desirable markets as Washington, D.C., Boston, Los Angeles, and San Francisco.
Image source: Getty Images.
The focus now is on developing and redeveloping properties in urban, mixed-use neighborhoods that include recession-resistant retail and residential units along with a smattering of offices and hotels.
The TJX Companies is the REIT's largest tenant, accounting for 37 stores and about 2.7% of the rent roll, with other significantly durable occupants such as The Gap, Ross Stores, Albertsons, and Home Depot also on the list.
They anchor properties that also are home to a growing number of smaller stores, all catering to markets that boast an average household income of $152,000, Federal Realty says.
That's more than twice the national median, and thus also attractive to trendy new success stories such as Cava Group (NYSE: CAVA).
Better than bonds (mostly) over the past decade
While Federal Realty's total returns haven't kept up with those of the S&P 500, of which this REIT is a constituent, if you're talking about reliable passive income, note that Federal Realty's current yield of about 4.2% is nearly triple the average payout of the index.
In fact, a better comparison might be to the bond market, which REITs compete with for income-focused investment dollars. Here's how Federal Realty's yield compares over the past 10 years to two different benchmark bond exchange-traded funds.
FRT Dividend Yield data by YCharts.
Modestly rising but steady payouts ahead
Now, Federal Realty hasn't raised its dividend yet in 2024, of course, since the year has just begun. But it's reasonable to expect it will, and when it does, it probably will be a pretty modest hike. After all, the REIT has raised its payout by only a cent a year since 2020.
In the meantime, it seems safe to presume the current management doesn't want to be the team that breaks the long-standing streak of annual increases, which suggests that this stock should provide a stream of recession-safe dividend income for years to come.
