Dividend stocks can be an excellent source of passive income. One thing investors like to look for when investing in these stocks is a company that consistently increases its dividend payout. Consistently increasing dividend payments can be a good sign of a stable business and strong capital management. However, these dividend payments may hide an ugly truth: poor investment performance.
Federal Realty Investment Trust (FRT 0.07%) is a real estate investment trust (REIT) that has increased its dividend payments for 56 consecutive years. Although it has been a reliable dividend stock, it has dramatically underperformed S&P 500, especially in recent years. Before buying a stock due to long dividend payments, what can we learn from Federal Realty.
It has increased its dividend payout annually for five decades
Federal Realty is a REIT, which means it is legally required to pay out 90% of its taxable income as dividends to shareholders, which is why income investors love investing in these types of stocks. These stocks have above average dividend yields and can be an excellent source of passive income from real estate without a large upfront investment.
The REIT offers a 4.47% dividend yield to investors by investing in retail and other mixed-use properties. It is highly selective about where it invests its money, focusing on areas close to major city centers in metropolitan markets. Furthermore, it chooses areas with high barriers to entry, high average household income and densely populated areas.
Federal Realty aims to make its business more resilient by focusing on high-income and densely populated areas that can better withstand economic downturns. This flexibility is a big reason why REITs have delivered solid dividend payouts to investors that have been increasing annually for 56 consecutive years.
Analysis of Federal Realty’s total returns in recent years
Despite its growing dividend, Federal Realty has not performed well for investors in recent years. Before 2016, Federal Realty was performing well. For example, from 2010 to 2016, the stock delivered a total return (including reinvested dividends) of 157%, compared to 107% previously. S&P 500 Index.
However, since 2016, Federal Realty’s returns have been negligible. Since then, the REIT’s total return has been -13% while the S&P 500 has gained 152%.
These struggles do not appear to be unique to Federal Realty. In the same period, friends regency center, Kimco RealtyAnd site center Also provided low 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. This, combined with the growth of e-commerce retailers such as Amazon, put downward pressure on fares. Although Federal Realty is well positioned in resilient sectors, it is not immune to these impacts.
Additionally, these companies have dealt with rising interest rates and the effects of the pandemic, which caused many retailers to rapidly close amid economic shutdowns to curb the spread of the virus.
Use this as a lesson in dividend investing
Companies that consistently increase their dividend payments can be solid investments for income investors. That said, you have to consider the total return of the investment over time. A company might have a good payout like Federal Realty, and it has a yield of 4.47%. While it may be a good dividend stock for your portfolio due to its consistent payouts, if the stock price loses value all at once, you may not be able to achieve the expected investment results.
It is important to remember that past performance is not 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 at an attractive yield and a long payment history when determining whether a dividend stock is worth the investment.
John McKay, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Courtney Carlson has no positions in any stocks mentioned. The Motley Fool has a post on Amazon.com and recommends it. The Motley Fool has a disclosure policy.
