Dividend investors are facing a really terrible situation today because of the high valuations being attached to stocks, broadly speaking. The S&P 500 index (SNPINDEX: ^GSPC), for example, has an itty bitty 1.3% dividend yield even after a swift sell-off. At first glance, you could do better with Citigroup(NYSE: C), a highly regarded bank that has a much higher 3.8% yield. That's more than the average bank, which is yielding around 2.6%. But don't stop your search with Citigroup; two other lesser-known financial stocks have higher yields and, perhaps, more attractive businesses.
Citigroup's record may not be as good as it looks
Citigroup has an above-market and above-bank-average dividend yield. That's great, but there's more to the story than that. The big number here is that the dividend has increased by more than 1,000% over the past decade. That's not a typo, and, at first, it sounds incredible. The problem comes when you look at the underlying dividend data.
In early 2016, Citigroup's dividend was $0.005 per share per quarter. That's a meager payment that was offered only so institutional investors with a dividend mandate could continue to own the stock. (Some institutional investors, such as pension funds and insurance companies, can only buy stocks that pay dividends.) Fast-forward to the end of 2024, and the quarterly dividend stood at $0.56 per share.
So, the real question investors should have is why the dividend was so low in 2016, given that Citigroup has existed for far longer than that time span. The token dividend came about because Citigroup floundered during the Great Recession and had no choice but to dramatically reduce its dividend. The increase is really just a recovery of the dividend, which is still nowhere near its pre-cut level. Citigroup's stock price isn't above its pre-cut levels, either.
There are better options for conservative dividend investors
While Citigroup is in a better financial state today than it was during the Great Recession, the difficulty the company faced during that period should cause a little trepidation for conservative dividend investors. It's a good thing that you can get higher yields from reliable dividend stocks like Realty Income(NYSE: O) and Federal Realty(NYSE: FRT).
Realty Income is a net lease real estate investment trust (REIT) with a heavy focus on single-tenant retail assets. The yield today is 5.8%, and the dividend has been increased annually for three decades. If you do the math on that, Realty Income increased its dividend right through the Great Recession. It did so through the dot-com crash and associated recession, as well.
Realty Income has an investment-grade-rated balance sheet and a portfolio that spans across North America and Europe. It is roughly three times the size of its next largest net lease peer. Altogether, Realty Income has multiple growth levers to pull: the scale to act as an industry consolidator, the size to take on deals its peers couldn't handle, and advantaged access to capital markets, which allows it to compete aggressively on price with regard to acquisitions.
Realty Income is a slow-growing giant, but given the high yield, that probably won't bother income-oriented investors. That's doubly true if dividend consistency is important to you.
Speaking of dividend consistency, there is no more consistent REIT than Federal Realty. This strip mall and mixed-use property landlord has increased its dividend annually for 57 consecutive years. That means it not only survived the coronavirus pandemic, the Great Recession, and the dot-com bubble, but it also handled Black Monday, the inflation of the 1970s, and the oil crises that got that inflation spike started. The dividend was increased through every difficult economic and market period going all the way back to 1967.
Federal Realty has an investment-grade-rated balance sheet but, unlike Realty Income, isn't focused on being an industry giant. In fact, it prefers quality over quantity and owns just about 100 properties. That said, its properties have higher average population sizes around them with higher average incomes than its peers. Essentially, it owns the types of retail properties in which retailers really want to be located. Federal Realty's yield is a bit lower at 4.9%, but if you want to make sure you get paid, it stands head and shoulders above Citigroup.
Don't settle for a well-known stock with a high yield
Citigroup is practically a household name, and it has an attractive yield, but that doesn't mean it is the right investment for your income portfolio. The company's performance through the Great Recession is highly troubling if you are relying on your dividends to pay your bills. You'll be far better off with high-yielding stocks like Realty Income and Federal Realty, which have better yields and far better dividend histories, even if they don't have the same name recognition.
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Citigroup is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
