I’m buying this passive income stock in my Stocks and Shares ISA

Could a REIT with an enviable portfolio of retail properties boost our author’s dividend income? He’s been buying the stock in his Stocks and Shares ISA.

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Key Points

  • Federal Realty Investment Trust focuses on high-quality properties in prime retail locations
  • The stock has increased its dividend each year for the past 54 years
  • The quality of the company's portfolio should give it some protection from the threat of e-commerce

I’m using my Stocks and Shares ISA to buy shares that will boost my dividend income. There’s one stock in particular that I’m buying at the moment.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The stock is Federal Realty Investment Trust (NYSE:FRT). It’s a real estate investment trust (REIT) that owns and leases 104 properties (predominantly retail properties) in eight major US areas.

Competitive advantages

When I’m investing in a business, I look for something that sets it apart from its competitors. In the case of Federal Realty, this is the quality of its assets.

Specifically, the company’s big advantage comes from where its properties are located. Federal Realty’s portfolio is concentrated in densely populated areas where the median income is high.

These are desirable characteristics for retailers, but space in these areas is limited. This makes it nearly impossible for competitors to develop comparable portfolios, giving Federal Realty an advantage over other retail REITs.

Outlook

Federal Realty has proved itself to be a resilient business. Like other REITs, it distributes its income to shareholders in the form of dividends, making it an obvious passive income stock.

The company has increased its dividend each year for the past 54 years. That puts it beyond Dividend Aristocrat status, making it a dividend king.

Unsurprisingly, Federal Realty faced a challenging period during the pandemic. Since then, though, the company has recovered well.

Management anticipates occupancy rates between 92.5% and 93% by the end of the year. And it also expects funds from operations – a key measure of REIT profitability – to increase by 5% and 9%.

Overall, I think that the outlook for Federal Realty looks strong. The business has a great track record of weathering difficult conditions and is recovering well after its latest challenge.

E-commerce

Investing in retail properties might seem risky with e-commerce on the rise. As retailers move their businesses online, demand for physical shops seems likely to decline.

I agree that the shift to e-commerce is likely to result in decreased demand for retail properties. But I think that Federal Realty is well protected from this threat.

As companies reduce their store count, I expect them to close their least efficient outlets first. Federal Realty’s focus on high-quality assets means that it typically houses more productive stores.

This means that I expect demand for Federal Realty’s properties to remain strong even as the overall demand for retail stores declines. The quality of its assets should protect it from the threat of e-commerce.

Investment thesis

Federal Realty has a strong track record and a positive outlook. I think that the quality of its assets should allow it to continue to prosper even as retailers expand their e-commerce operations.

At current prices, the dividend yield is 4%. I’m happy to buy this in my Stocks and Shares ISA and let the dividends compound.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Stephen Wright has positions in Federal Realty Investment Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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