Dividend stocks can be a great way for investors like me to build passive income. When things go well, dividends can be a reliable source of cash.
It’s important to pay attention to how safe the stream of dividends is, though. Buying a stock with a 9% dividend yield today is no good if the company isn’t going to be able to pay dividends after this year.
Moreover, when things go wrong with dividend stocks, they can go really wrong. A good example of this is Compass Minerals (NYSE:CMP).
Last November, Compass Minerals announced that it was cutting its dividend by 79%. Overnight the stock fell from $72.10 per share to $57.02.
There’s a general lesson here. Companies lowering their dividends can cause their stock prices to fall sharply, meaning that investors get hit both in the loss of passive income and a lower share price.
It’s therefore really important for me to make sure that the companies I own shares in aren’t likely to lower their dividends. With that in mind, here are two of the safest dividend stocks on Earth.
REITs
The stocks in question are Federal Realty Investment Trust (NYSE:FRT) and Realty Income (NYSE:O). Both are real estate investment trusts (REITs).
As REITs, both businesses make their money by renting out real estate. A consequence of being a REIT is that both companies are required to distribute 90% of their rental income in the form of dividends.
This means that neither company has the opportunity to decide not to pay dividends. Unlike Compass Minerals, management can’t decide to retain earnings to focus on growth instead of returning cash to shareholders.
In general, I think that being required to pay dividends is disadvantageous. In my view, it can leave management unable to take advantage of growth opportunities.
However, I do believe that the fact that both stocks are REITS makes for additional dividend safety. As I see it, the dividends are likely to keep flowing as long as the companies keep generating rental income.
Dividend aristocrats
Another reason for thinking that these are two of the safest dividend stocks on earth comes from their history. Realty Income is a dividend aristocrat and Federal Realty is a dividend king.
Dividend aristocrats have raised their dividend annually for at least 25 years. Realty Income has 28 years of consecutive annual dividend increases.
Federal Realty has been increasing its annual distributions for 55 years. That puts it through the 50 years required for dividend king status.
In both cases, a long history of dividend increases gives me confidence that these will continue. It means that each company has raised its payout consistently through various difficult economic environments.
Furthermore, each company’s dividend is central to its identity. Management makes information about its distribution record a central feature of its website in both cases.
Again, this indicates to me that dividend payments from both companies are likely to continue to increase.
Safe dividend stocks
Lowering its dividend can sometimes be the right thing for a company to do. But I don’t think that either Federal Realty Investment Trust or Realty Income are likely to be in this position – I see them as two of the safest dividend stocks I can buy.