Better Buy: Federal Realty Investment Trust vs. Realty Income

Federal Realty Investment Trust (NYSE:FRT) and Realty Income (NYSE:O) have a lot in common that commends them to investors as long-term buy and holds.

They’re both real estate investment trusts (REITs), which requires that pay at least 90% of their taxable income to shareholders. They generate that income from their commercial real estate portfolios, counting on their tenants to provide real estate investors with a steady flow of cash and share price appreciation over a period of years.

Notice I said years. What makes Federal Realty and Realty Income such compelling choices is their venerability matched by performance. Both are Dividend Aristocrats, which means they’re among the 65 members of the Standard & Poor’s 500 that have raised dividends for 25 straight years or more. Federal Realty goes a step further. It’s one of the 31 companies meriting the title of Dividend King bestowed for 50 straight years of payout increases.

Below, we’ll look a bit deeper at each of their portfolios and performance.

Image source: Getty Images.

Realty Income is an 11,000-pound giant among retail REITs

Realty Income, with a market value of about $40 billion, is by far the larger of the two, with about 11,000 properties under long-term, net-lease contracts with 650 different clients in all 50 states, the U.K., and Spain. Net-lease contracts require tenants to pay most of a property’s operating costs. 

Dollar General and Dollar Tree-Family Dollar account for 1,462 of those leases and 7.5% of the REIT’s rental revenue. 7-Eleven (592 leases) and Walgreen’s (246 leases), meanwhile, individually account for 5.7% and 5% of rent revenue, respectively. Then there’s FedEx, with only 42 leases but 3.4% of total rent.

As for performance, Realty Income has posted annualized dividend growth of 4.5% since joining the NYSE in 1994. Its record actually goes back to 1969, when it was created to provide monthly dividends to shareholders long before it went public.

Realty Income calls itself the “Monthly Dividend Company,” and right now that payout is $0.246 a share every month, good for a yield of about 4.1% based on its recent share price of about $71. 

Federal Realty is smaller but also mighty

Federal Realty has a market cap of about $10.7 billion, one fourth that of Realty Income, and a much smaller footprint. Instead of casting such a wide net, Federal Realty focuses on what it calls “award-winning retail environments and mixed-use neighborhoods in the nation’s most desirable markets.”

It has 106 properties with about 3,100 commercial real estate (CRE) tenants and about 3,200 residential units concentrated in coastal markets such as Washington, D.C., Boston, San Francisco, Los Angeles, Chicago and Phoenix.

Federal Realty, which pays its dividend four times a year, raised its quarterly payout by a penny to $1.07 a share last summer, continuing a string of 54 annual increases, the longest in the REIT industry. That’s good for a yield of about 3.15% based on the recent share price of about $135.  

Realty Income has the total return lead, and gets the nod here

As an income-focused investor I like to look at total return, taking into account dividends and share price growth. Realty Income is the clear winner here, as $10,000 invested in its stock 10 years ago would now be worth about $32,000, compared with about $21,000 for Federal Realty.https://ycharts.com/charts/fund_chart_creator/fool/#/?annotations=&annualizedReturns=false&calcs=i[…]=&title=&units=false&useEstimates=false&zoom=10

Realty Income and Federal Realty are both widely held, widely respected members of the real estate sector and for good reason. They both have long records of reliable paybacks and decent returns, making them ideal candidates for a retiree’s portfolio.

As for looking ahead, Federal Realty has increased its 2022 forecast for funds from operations (FFO) per diluted share from an estimated $5.45-$5.50 for 2021 to $5.65-$5.85 for 2022 Realty Income, meanwhile, says it has invested in $1.61 billion in 308 properties and properties under development or expansion, including $532.5 million in Europe.

Those are just two of the metrics that point to continued solid returns from these two dividend stalwarts. Stocks like these are often viewed by individual investors as an alternative to low-yielding bonds, cash, and certificates of deposit. Either of these two will do that just fine.

A big choice is whether you prefer the payout monthly or quarterly, of course, but there’s more. Realty Income’s higher yield and stronger returns and its significant investment in revenue growth gives it an edge over its worthy competitor.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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