Federal Realty Investment Trust: Taking A Look At The 5.0%-Yielding Preferreds

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About: Federal Realty Investment Trust (FRT), FRT.PC
by: Achilles Research
Summary

Federal Realty Investment Trust's preferred stock is a promising income vehicle and an alternative to FRT's common stock.

The Series C offers risk-conscious investors a higher dividend yield and less volatility.

I discuss the pros and cons of investing in FRT's preferred stock layer.

An investment in FRT's Series C preferred stock yields 5.0 percent.

Federal Realty Investment Trust's (FRT) preferred stock layer offers investors with a low risk tolerance a way of investing in the commercial property REIT at an attractive yield and with less risk, relative to the common shares. Federal Realty Investment Trust's preferred stock is less volatile than the REIT's common shares and provides investors with a high degree of principal safety as well as high, regular dividend income. An investment in Federal Realty Investment Trust's preferred stock layer yields 5.0 percent.

Alternative To The REIT's Common Shares

Just a few days ago, I penned a lengthy piece on Federal Realty Investment Trust titled "Federal Realty Investment Trust: This 3.1%-Yielding Dividend King Is A Rock Of Stability For Income Investors" in which I discussed the REIT's common stock value proposition. However, much of what I wrote in this article centered around the REIT's core business, balance sheet, and portfolio stats, so it would be a good read for investors that want to consider the commercial property REIT's preferred stock, too.

In this article, I am going to discuss the properties of Federal Realty Investment Trust's 5.00% Series C Cumulative Redeemable Preferred Shares (FRT.PC) which were issued in 2017 as a way for the REIT to diversify its capital structure and raise capital for investments.

Advantages Of The Series C Preferred Stock

The Series C preferred stock is an attractive income vehicle for investors that want to dial down investment risk without sacrificing yield. Federal Realty Investment Trust's Series C preferred stock has been less volatile than the REIT's common shares, which provides investors with a higher degree of principal safety.

Here's FRT's common and preferred stock volatility in comparison.

Source: Tickertech

The compelling thing about the Series C preferred stock is that it comes with a very attractive dividend yield. The Series C pays shareholders a quarterly dividend of $0.3125/share, or $1.25/share annualized. Since the Series C preferred stock sells for $25 at the time of writing (no premium/no discount to the liquidation preference value of $25/share), investors can secure a very decent 5.00 percent dividend yield.

The Series C preferred stock yield is VERY competitive when compared against Federal Realty Investment Trust's common stock yield. Since the REIT's common stock yields just 3.09 percent (yield compressed due to high valuation), investors in the Series C preferred stock have a 191 basis point yield advantage over the common stock. This differential, however, can be expected to decrease over time as the common stock dividend grows and the preferred stock dividend remains fixed.

The Series C's call date is 9/29/2022.

Disadvantages Of The Series C Preferred Stock

One big shortcoming of Federal Realty Investment Trust's Series C preferred stock is that it doesn't provide capital or dividend upside. So, while the Series C protects investors' principal due to its higher ranking in the capital structure relative to the common shares, the preferred stock will not produce any significant capital gains going forward. Hence, the Series C may be a good way for risk-conscious investors to hedge against a market downturn. In addition, Federal Realty Investment Trust has grown its common stock dividend for 51 years straight, meaning investors that buy the Series C won't benefit from future dividend growth at all.

Your Takeaway

Despite its shortcomings, Federal Realty Investment Trust's preferred shares (which get little coverage) are an attractive alternative to the commercial property REIT's common shares for income investors that prioritize principal safety and that want to secure a very attractive dividend yield. Investors that like to invest for the long haul and want to participate in FRT's expected dividend growth going forward may want to consider the REIT's common stock. Buy for income.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.