Pricing power
Federal Realty Investment Trust (NYSE:FRT) focuses its property portfolio on high density urban areas in California and Pennsylvania metro areas. Pricing power is exactly what Federal Realty Investment Trust (NYSE:FRT) brings to the table. This company holds properties in areas that are growing in population and rents out to stable customers like Whole Foods. Even when a renter from Federal Realty Investment Trust (NYSE:FRT) runs into troubled times and has to cancel a lease, Federal Realty’s properties are able to attract renters almost immediately.
This overt pricing power has been great for Federal Realty. However, this same pricing power has also driven up the price of its stock, making it less of a desirable investment. Federal Realty Investment Trust (NYSE:FRT) has seen its stock price rise over 50% over the past 5 years giving investors a 9% return of capital gains. Meanwhile, the dividends returned an average of 3.2% per year over those same period, giving investors a total of 12.2% return without re-investing dividends.
Federal Realty Investment Trust (NYSE:FRT) is currently yielding a meager 2.8%, but the location of its properties does offer this company greater security than most REITs in the consumer staples space. This is a premium company that comes with a premium price tag. If there is a pull back, investors should look to pick up some of this stock when it goes on sale.
Tax considerations
REITs throw off large amounts of capital as they are required to pay out 90% of their earnings or more. As a pass through entity, REITs are taxed at an individuals personal tax rate as opposed to the dividend favored tax rate of 15%. With this knowledge, an investor would be better off holding their high yielding REITs in a traditional or Roth IRA.
Collapse in REIT prices
Since the Fed recently announced that they are considering ending their bond buying program, fixed income asset prices have collapsed. Realty Income Corp (NYSE:O) has had its stock price collapse by over 10% in the past month.
The silver lining in all of this is that if you are in the market to buy, now is a great time to pick up this company. Realty Income Corp (NYSE:O) is also known as “The Monthly Dividend Company” since this REIT pays out its dividends on a monthly basis. If someone is looking for consistent monthly income that will rise over time, this stock is for you.
Realty Income Corp (NYSE:O) owns a diverse set of properties that rents out to an equally diverse set of clients. This helps the company diversify its revenue stream and not rely too heavily on any sector of the economy. The company is currently yielding 4.7%, and renews approximately 11% of its properties each year, giving it some flexibility for the dividend to outpace a dramatic uptick in inflation.
In addition to collecting a monthly check, this company has also returned nearly 90% price appreciation over the past 5 years. That is a 14% compounded return, without counting dividends, even taking into consideration the recent pullback.
Stable bill payers
Government Properties Income Trust (NYSE:GOV) is a REIT that, like its name suggests holds properties that it rents out to government entities. This conservative company has entire buildings rented out to Federal, State and local governments, as well as government agencies like the IRS.
This Steady Eddy company looks to maintain a reasonable amount of leverage, while seeking out the best properties. The companies shares yield nearly 7%, and will continue to spin off large amounts of cash, although with more limited upside than both Realty Income Corp (NYSE:O) and Federal Realty Investment Trust (NYSE:FRT).
On its most recent earnings call, the company cited easy money for its less conservative competitors as the main reason for no recent property acquisitions. As other REITs have less stringent borrowing leverage policies in place, they are scooping up properties for higher premiums than in recent years.
Government Properties Income Trust (NYSE:GOV) management team is operating a tight ship. With an operating margin of 32.2%, the company pays out $1.72 per share in dividends, while free cash flow stands at $2.10 per share. The other $0.38 per share can then be used to pay off excessive debt or purchase additional properties, whatever the company sees fit at the time. Management has reiterated that it will continue to provide investors with a safe high yield investment for years to come.
Foolish bottom line
Government Properties Income Trust (NYSE:GOV) provides giant yield that can fund positions in other investments like growth stocks. Conservative investors looking for yield while still wanting to sleep at night should pick up some Government Properties shares and park them in an IRA.
For investors with more time on their hands, the potential of both Federal Realty Investment Trust (NYSE:FRT) and Income Realty to increase their payouts over time is an enticing offer. If and when the Federal Reserve slows down its bond buying program, look for these stocks to go on sale.
The article Slow and Steady Sources of Income originally appeared on Fool.com and is written by Wes Patoka.
Wes Patoka owns shares of both Government Properties and Realty Income Corp (NYSE:O). The Motley Fool has no position in any of the stocks mentioned. Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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