Working more hours to improve your salary and/or starting a side hustle are two ways to earn more income. But both require you to trade time in order to earn more money. That's why passive income -- money you don't have to actively work for -- can be a more productive use of an investor's time.
Dividend stocks can be fantastic passive income streams. Not only do they tend to provide consistent income, but that income can grow over time and help hedge against inflation. Federal Realty Investment Trust (FRT -0.83%) offers a great example of a growing dividend stock. The company increased its dividend payout annually for 55 straight years, earning it the title of Dividend King.
Federal Realty's stock price is down 27.4% so far this year, despite its strong earnings and its excellent dividend track record. Let's take a closer look at why Federal Realty Investment Trust could be a great way to earn more income today.
Federal Realty has a track record that's hard to beat
Federal Realty Investment Trust is a retail-focused real estate investment trust (REIT) that specializes in the acquisition, ownership, and development of high-end, open-air shopping centers. As of mid-2022, the company owned and leased around 25 million square feet of retail space in nine major metro markets across the country.
The tax structure of a REIT requires that it pay out at least 90% of its taxable income to shareholders (usually through dividends). That generally means REITs pay out higher dividends (as measured by yield) than your average stock. Federal Realty Investment Trust's current yield is an attractive 4.3% yield -- more than double the S&P 500's 1.82%.
The steady income it gets from its long-term triple net leases is the main reason the company maintains such an outstanding track record of dividend growth. Triple net lease real estate means the tenant takes care of property expenses like taxes, maintenance, and insurance. The leases also tend to be longer (lasting five- to 10 years) and most have built-in annual rent escalators which are often pegged to the inflation rate. All these factors help the owner maintain steady revenue growth.
For the 12 months that ended June 30, Federal Realty Investment Trust managed 2 million square feet of leases, with the rental rate around 6% higher than its previous contracted leases. While 6% may not seem like a huge jump, that consistent rate of growth is what makes the company such a reliable passive income stream.
This steady growth remains strong through economic downturns. During the 2008-2010 Great Recession, Federal Realty's funds from operations (FFO, a metric that equates to earnings per share for REITs) rose for all but one year, and it achieved higher lease rates than all of its retail REIT peers combined.
Why right now is a great time to buy this Dividend King
Pessimistic outlooks for the economy in 2022 and 2023 and the impact a recession could have on retail spending pushed Federal Realty Investment Trust's share price down about 27.5% this year. Its price when ratioed to its projected full-year FFO is around 16. REITs typically trade between 10 and 20 times their FFO, which means Federal Realty Investment Trust is priced fairly relative to its earnings.
The company is also actively diversifying its portfolio, adding more office, hotel, and residential properties to its holding through mixed-use developments. This should add more diversity to its income streams and act as a buffer if the retail industry takes a hit from a potential recession (as many predict it might).
Federal Realty just raised its dividend in Q2, so it'll likely be another few quarters before it raises its dividend again. But dividend increases are likely to come. Its payout ratio is conservative at 65%, and it's in an extremely strong financial position. The company has $1.2 billion in liquidity and has a low debt-to-earnings before interest, taxes, amortization, and depreciation (EBITDA) ratio of 4.31.
Its flush cash position should help it ride out any economic turbulence in the retail market while maintaining its dividend increases, especially since it has no major debt maturities to manage until 2025. As the economy improves, the stock price will likely recover as well, earning those who buy the stock now some significant stock price appreciation to go along with the passive dividend income.