It would be hard to suggest that investors buy anything for "life," but there are those rare companies that warrant a close examination as forever holdings. In fact, the 2020 coronavirus pandemic highlighted some of the best possible candidates in the real estate investment trust (REIT) sector. Two that really shined were Realty Income (NYSE: O) and Federal Realty Investment Trust (NYSE: FRT). Here's a quick look at each and why conservative investors might want to own these "set it and forget it" REITs.
Barely a blip
Realty Income is a net lease REIT, meaning it owns single-tenant properties for which its tenants pay most of the operating costs. It's a fairly low-risk investment approach in the REIT sector, since Realty Income doesn't have to deal with property-level cost variability.
That was a huge benefit during 2020, as the pandemic resulted in increased cleaning efforts and reduced foot traffic across just about every property type. And while Realty Income's rent collection rate did drop early on as its tenants struggled, collections were back into the mid-90% range by the end of the year. In other words, it looks like the lasting damage will be minimal and manageable.
What's most interesting here, however, is that Realty Income increased its dividend each quarter in 2020 despite the pandemic. The increases were modest, for sure, but the message was loud and clear: Management didn't see a reason to worry about its long-term future.
That's not actually too surprising, given that the REIT is a Dividend Aristocrat, with over 25 consecutive years worth of annual dividend hikes under its belt. Paying a reliable dividend is core to the company's being, noting that it's trademarked the nickname "The Monthly Dividend Company."
Adding to the allure here is the company's massive scale, with a portfolio of around 6,600 properties. Although about 85% of its assets are tied to retail (the rest are in the industrial and office sectors), around half of its tenants are investment-grade. In other words, it has a solid, material foundation.
While this size confers some advantages, noting that no single property will have a notable impact on the REIT's financial results, there is a caveat: Realty Income is likely to grow slowly over time. But, for conservative dividend investors, slow and steady is probably not a problem.
The current 4.1% yield is roughly in the middle of the company's 10-year range, so it isn't a screaming buy here. But a fair price for a great company is probably still a pretty good deal for most investors.
A curated list
Federal Realty sits toward the opposite end of the size spectrum, with just 100 or so outdoor shopping centers and mixed-use developments. But that's part of the allure here, because this landlord has focused on location, location, location, buying properties around wealthy, population-dense regions.
These are the types of assets that retailers want to be in, which was highlighted by the pandemic, noting that the REIT was able to bring in new tenants that had nearby locations. Effectively, these retailers were taking advantage of the COVID-19 dislocations to upgrade their properties, and that meant moving into a Federal Realty shopping center.
That said, the pain here is hardly over. Federal Realty expects occupancy to fall into the mid-80% range in the first half of 2021 before it starts to improve again. Don't get too caught up in that -- it takes time to retenant shopping centers, and Federal Realty is being open and honest about the process. The key takeaway is the demand for the company's centers remains resilient, and given time, any holes in these desirable assets will be filled.
In the meantime, investors should take heart in the over five decade-long streak of annual dividend hikes here. That's an incredible run that Federal Realty claims is the longest in the REIT space. It's also long enough to make the landlord a Dividend King, an even more elite group than the Aristocrats.
Notably, that streak includes a dividend increase in 2020. Meanwhile, the 3.9% dividend yield here is still at the high end of the yield range over the past decade. Like Realty Income, it's hardly a value play, but for long-term investors seeking out a buy-and-hold dividend stock, it's still worth a close look right now.
Don't sweat the small stuff
Investors who think long term should be focusing on the inherent strengths of the companies they buy. When it comes to REITs, Realty Income and Federal Realty stand out for their successful execution of strong business strategies in both good markets and bad. That has shown up in their incredible dividend histories and helps to make them the types of low-risk, buy-and-hold stocks that even the most conservative investors could own for the rest of their lives.