I’m a dividend investor, and I know what it feels like to explore stocks offering a double-digit yield. You want to believe it is a diamond in the rough that will pay you 10%-plus dividends forever. Those situations do occur, but not very often. Whether you have $500 or $5,000 to invest in dividend stocks right now, you need to make sure you focus on reliable dividend payers.
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Real estate investment trusts (REITs) are designed to pass income on to investors in a tax-efficient manner. They avoid corporate-level taxation if they pay out at least 90% of their taxable income as dividends. The offset is that shareholders have to report the dividends as if they were earned income (taxes can be completely avoided by owning a REIT in a Roth IRA). Generally speaking, REITs pay attractive dividends and have relatively large dividend yields.
If you are trying to live off the income your portfolio generates, REITs should be in the mix. However, just like non-REITs, you have to be careful about which companies you buy. Some REITs have impressive dividend histories, while others have volatile dividend histories. Some REIT business models, by design, pay variable dividends.
If dividend consistency is your top priority, there is one REIT that stands above all others: Federal Realty(NYSE: FRT). It has increased its dividend annually for 58 consecutive years, which makes it a Dividend King. That is the longest dividend streak in the REIT sector, and Federal Realty is the only REIT to have achieved Dividend King status.
Federal Realty achieved this goal by focusing on quality over quantity. It owns roughly 100 strip malls and mixed-use assets. They tend to be located near large population centers that have high concentrations of wealth. Furthermore, Federal Realty is an active portfolio manager, continually making capital investments to enhance the value of its properties. It is also willing to sell assets that have reached their full potential, so it can buy new properties that need a little love.
Federal Realty’s dividend yield is 4.4% today. That is roughly 4 times higher than the 1.1% yield of the S&P 500(SNPINDEX: ^GSPC) index and above the 3.9% REIT average. For most dividend investors, Federal Realty will be a solid portfolio holding, with $500 netting you around four shares of this reliable dividend stock.
For some investors, however, 4.4% will feel like a low number when you can buy a REIT like AGNC Investment(NASDAQ: AGNC) with a 12.5% yield. That yield is highly attractive, and the mortgage REIT is well respected. However, it is not a reliable dividend payer. The graph below highlights the problem.
If you need to use the dividends you collect to supplement your Social Security checks, you would have been sorely disappointed with AGNC Investment. Not only has the dividend been volatile, but it has also trended steadily lower for over a decade. And the stock price has followed the dividend lower. Less income and less capital are not what most dividend investors have in mind when they buy a high-yield stock. I know for a fact that this isn’t my goal.
Federal Realty is the cream of the crop when it comes to dividend-paying REITs. But it is hardly the only reliable dividend payer in the REIT sector. For example, Realty Income(NYSE: O) has increased its dividend annually for 30 years and has a 5.4% yield.
The company owns single-tenant properties using a net lease approach, which means the tenant is responsible for most property-level costs. Realty Income is the industry giant, with a portfolio of more than 15,500 properties spread across the United States and Europe. Although it is primarily concentrated in retail assets, the company also owns industrial properties and a diverse collection of unique assets, including data centers and casinos.
Moreover, it is branching out into lending and asset management for institutional investors, as well. A $500 investment will allow you to buy eight shares of this monthly paid dividend stock.
Federal Realty and Realty Income are foundational investments for dividend lovers. However, they aren’t the only reliable dividend stocks you’ll find in the REIT sector. They are just two very good examples of what you can find if you dig into the sector.
AGNC Investment, meanwhile, is an example of the type of dividend-paying REIT that you need to be wary of. The company meets its goal of producing attractive total returns, but that goal assumes dividend reinvestment. That means you can’t use the dividend, which is highly volatile, to pay for living expenses.
Make sure you put all the pieces of the puzzle together before you buy a dividend stock. Dividend yield alone isn’t enough information for you to make a final investment decision.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
