Dividend stocks can be an excellent source of passive income. One thing investors like to see when investing in these stocks is a company that continually increases its dividend payout. A constantly increasing dividend payment can be a good sign of a stable business and strong capital management. However, these dividend payments could be covering up an ugly truth: subpar investment performance.

Federal Realty Investment Trust (FRT 0.07%) is a real estate investment trust (REIT) that has increased its dividend payment for 56 consecutive years. Although it was a reliable dividend stock, its performance fell well short S&P 500, especially in recent years. Before we buy a stock based on its long dividend payout, here’s what we can learn from Federal Realty.

The company has increased its dividend payment annually for five decades

Federal Realty is a REIT, meaning it is legally required to distribute 90% of its taxable income to shareholders in the form of dividends, which is why income investors like to invest in these types of stocks. These stocks tend to 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 investors a 4.47% dividend yield by investing in retail and other mixed-use properties. It invests its money very selectively and focuses on regions near large city centers in metropolitan markets. In addition, areas with high barriers to entry, high average household income and dense populations are selected.

Federal Realty wants to make its business more resilient by focusing on high-income, densely populated areas that can better withstand economic downturns. This resilience is a big reason the REIT has provided investors with a solid dividend payout that has increased every year for 56 consecutive years.

Analysis of Federal Realty’s total returns over the past few years

Despite its rising dividend, Federal Realty hasn’t performed well for investors in recent years. Prior to 2016, Federal Realty had solid performance. For example, from 2010 to 2016, the stock delivered a total return (including reinvested dividends) of 157%, compared to 107% in 2016 S&P 500 Index.

However, since 2016, there has been no return for Federal Realty. Since then, the REIT has delivered a total return of -13%, while the S&P 500 is up another 152%.

These problems don’t seem to be unique to Federal Realty. At the same time, colleagues Regency centers, Kimco RealtyAnd SITE Centers have also achieved below-average returns of 22%, 1% and -28%, respectively.

A few factors have impacted retail REITs since 2016. For one thing, the retail industry has been going through a transformation that some are calling the “retail apocalypse.” There was an oversupply of retail space. This coupled with the growth of e-commerce retailers Amazon, putting pressure on rents. Although Federal Realty is well positioned in resilient areas, it is not immune to these impacts.

Additionally, these companies have had to contend with rising interest rates and the impact of the pandemic, which accelerated the closure of many retailers amid economic shutdowns to stop the spread of the virus.

Use this as a lesson for dividend investing

Companies that consistently increase their dividend payments can be solid investments for income investors. With this in mind, you need to consider the overall return on the investment over time. A company might have a nice payout, like Federal Realty, and a yield of 4.47%. Although it could be a good dividend stock for your portfolio due to its consistent payouts, if the share price declines at the same time, you may not get the investment results you were hoping for.

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 delve a little deeper into the industry and look beyond an attractive yield and long payout history when deciding whether a dividend stock is worth investing in.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.

Source : www.fool.com

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