Last week, I brought up the term “SWAN investing” amid the ongoing market confusion. It stands for “sleep well at night,” and describes a stress-free way to own reliable stocks that pay you larger and larger dividends.
This is something I’m pretty passionate about and have been for a while – ever since I lost my business and source of income in 2008 after holding only what I thought were “sure thing” investments. That, of course, was a portfolio of commercial real estate assets I amassed during my time as a developer and landlord.
They were all the rage at the time… until they weren’t.
I built my life back together using SWAN stocks as the basis of my portfolio. And, today, I use the term frequently to help other investors understand the importance of owning defensive, high-quality, blue-chip assets.
I even included the term in my latest REITs For Dummies book:
SWAN (sleep well at night): A term used (but not coined) by the author to refer to a high-quality stock that is very likely to operate stress-free and offer unbroken, ever-growing dividends.
But there is more to making the most of SWANs than just buying them. You need to buy them at the right time, recognizing that there are two primary drivers of long-term returns when investing in stocks:
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The rate and consistency of earnings growth that the business model generates. When a business regularly grows its earnings and profits, its long-term returns will do the same over the long run. In other words, long-term investment returns are highly correlated to how sustainably a company grows its business. Just remember the “long-term” aspect, because you need a company that’s built to last.
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The valuation you pay for that business. This isn’t the same thing as price, for the record. It’s the amount of money you pay to buy a company’s estimated earnings (or cash flow) growth. If you pay too high a valuation, you’ll earn less than the business’ growth warrants. Whereas a lower valuation will cause you to earn more, all else equal.
Now, there are always quality stocks out there trading at low valuations for one reason or another. But that’s definitely not the norm for SWANs.
So when it does happen, you’d better believe my team and I are going to talk about it. And it just so happens that market-wide drops like what we’re witnessing open up ample opportunities.
Don’t Market-Time Your SWANs
Before I go any further, let me make a very important point about valuation…
There is no way to accurately and consistently time short-term market movements. So don’t get caught up in thinking SWAN prices could keep dropping from here, making their valuations even more attractive.
They might. Or they might go up from here. I don’t know. Nobody really knows.
My job and my team’s job here at Wide Moat Research is to help you make the most of investment opportunities that come our way. So let me reiterate: Don’t worry about what the market may or may not do tomorrow.
That kind of day-to-day or even month-to-month activity doesn’t matter when you have a portfolio that’s based on SWANs.
While there’s always the chance that one might fail you here or there – which is why you should never put all your eggs in one single stock or sector “basket” – the chances of multiple SWANs failing at the same time is very, very, very low.
Their share prices might all dip or even dive at the same time. But that is not the same thing as failing.
As I wrote on Thursday, “SWAN stock share prices almost always go up again. And they pay you dividends all the while you wait.”
That’s what tends to happen when you make your investment decisions based on quality, valuation, and whether the stock in question is right for you.
Only you can answer for that last factor. But let me tell you my take on Federal Realty Investment Trust (FRT) for the other two – quality and valuation.
Set Your Sights on These Two SWANs
For starters, FRT – a shopping center real estate investment trust (“REIT”) – is a dividend king. That means it has paid and raised its dividend for at least 50 consecutive years.
In fact, it’s done that for 57 years. And counting.
The company owns a portfolio of 102 properties, complete with 3,500 commercial tenants and 3,100 residential units. And those buildings are especially concentrated in high-income markets with an average aggregate income of $10.7 billion within a three-mile radius.
It’s therefore no surprise that Federal Realty boasts a solid investment-grade-rated (Baa1/BBB+) balance sheet. Or, more specifically, that it had over $1.4 billion in liquidity as of the fourth quarter of 2024.
Meanwhile, shares are cheap, now trading at $93.72 with a price to adjusted funds from operations multiple – the REIT equivalent of earnings per share – of 18.4 times. Compare that to FRT’s 10-year average of over 26.8 times.
The company now enjoys a 4.7% dividend yield. And analysts expect 6% annual growth in 2025, 2026, and 2027… in which case, it should easily celebrate its 60-year dividend record soon enough.
Wide Moat is forecasting a 25% annualized return for FRT in both 2025 and 2026.
Source: FAST Graphs
Another solid real property play is Enterprise Products Partners (EPD). Though this one is structured as a master limited partnership, or MLP, so it issues a K-1, not a 1099.
EPD is a mission-critical, energy-infrastructure tollbooth. Its 50,000 miles of pipeline provides midstream energy services to natural gas, natural gas liquid, crude oil, petrochemical, and refined product producers and consumers.
Better yet, it mitigates inflation risk by using long-term contracts with escalation provisions.
EPD has a fortress balance sheet with A-level ratings from all three major agencies. It has paid and increased its dividend for over 25 years in a row now, making it a dividend aristocrat. And, as with FRT, shares are cheap.
They’re trading at $31.02 with an 11.3 times price-to-earnings ratio, compared with a multiple of 17.4 times, which it carried for many years prior to the pandemic, which was very disruptive to energy. Its dividend yield is 6.9%, and analysts expect it to grow 8% this year and 6% in 2026.
Wide Moat is forecasting 20% annualized returns for both years.
Source: FAST Graphs
Happy SWAN investing,
Brad Thomas
Editor, Wide Moat Daily
PS: Fellow analyst Nick Ward and I will be discussing SWANs further this week on our YouTube channel. Make sure to watch by subscribing HERE.
MAILBAG
What are some of Brad’s SWAN tips that you have followed before? Write us at feedback@widemoatresearch.com.