Investors typically own Real Estate Investment Trusts (REITs), for their high dividend payouts. The average stock in the S&P 500 Index pays a dividend yield of less than 2%, but many REITs offer 3%+ yields.
Not only that, but the best REITs can raise their dividend payouts each year. Combining a 3%+ dividend yield and regular dividend growth can be a recipe for strong returns over time.
Federal Realty Investment Trust (FRT) has a 3.2% dividend yield, which is significantly higher than the S&P 500 average. And, the company has raised its dividend each year for the past 51 years in a row. These qualities make it an attractive stock for investors interested in dividend income today, and even higher dividend payouts down the road.
Business Model Leads to Steady Growth
As a REIT, Federal Realty’s business model is to own real estate properties, and lease them out to tenants. It collects rental income, which it can use to invest in new properties. This leads to gradually-increasing cash flow over time, and allows the company to raise its dividend payout each year. Federal Realty primarily owns shopping centers, but it is also involved in redevelopment of multi-purpose properties including retail, apartments, and condominiums.
The company ended the most recent quarter with 105 properties, approximately 3,000 tenants, and over 2,600 residential units. It had an occupancy rate of 95% in the most recent quarter. For the period, Federal Realty’s Funds from Operation, or FFO, increased 4%, thanks to cash flow growth from existing properties as well as contributions from acquired properties. The company expects FFO-per-share of $6.13 to $6.23 for 2018, which would represent 7%-8% growth this year.
The major risk for REITs today is the potential rise in interest rates, which could elevate the cost of capital for companies that rely on external sources of financing. Federal Realty is well-prepared to navigate a rising-rate environment. Over 90% of the company’s debt is fixed-rate, which means the company will not be caught off-guard by a quick jump in rates. And, the company has an investment-grade credit rating of A- from Standard & Poor’s, which is a relatively high rating for a REIT.
Dividends Grow Like Clockwork
A strong balance sheet and high-quality property portfolio allow Federal Realty to increase its dividend each year. The company delivered a 2% dividend increase after reporting second-quarter results. It has increased its dividend for 51 years in a row. The current dividend yield of 3.2% will boost its shareholder returns.
The dividend payout is highly secure. Federal Realty has an annualized dividend payout of $4.08 per share. Based on the company’s guidance for 2018, it will have a payout ratio below 70% for this year. This is a manageable payout ratio for a REIT, and leaves room for continued dividend increases each year, particularly since the company will continue to grow FFO each year. Federal Realty has potential to increase FFO by 5%-6% per year over the long-term.
The stock valuation is also attractive, as Federal Realty shares trade for 20 times FFO. A higher stock valuation could add 2% to annual shareholder returns. The combination of current dividend yield, FFO growth, and valuation expansion could produce total returns of 10% or more each year. There are higher dividend yields than Federal Realty among the REIT asset class, but none can match Federal Realty’s track record of annual dividend increases.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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