Dividend yield differences can have a significant impact on your portfolio. If you were to invest $25,000 in the average stock of the S&P500 which pays 1.4%, your annual dividend income would total $350. If, instead, you invested in a stock that earns 5%, your income would total $1,250.
A stock that yields an even higher return is Omega Health Investors (IHO 3.06%). At 9.9%, the yield could yield nearly double the income you would get from a 5% stock. And while it sounds too good to be true, its dividend may actually be safe.
The company’s activity is diversified and concentrated on a stable segment
Omega Healthcare is a real estate investment trust (REIT), and as long as its tenants pay their bills, the dividend should be safe.
The REIT has a diversified portfolio that includes more than 930 operating healthcare facilities across the United States and the United Kingdom. Specifically, it focuses on investing in senior care, in facilities that shouldn’t have problems with demand as baby boomers retire and seniors make up more of the population. – by 2030, all baby boomers will be 65 or older. But while there are long-term opportunities in elderly care, it’s the short term that worries investors.
The company last announced its results on May 2. CEO Taylor Pickett acknowledged that there had been non-payments “by a few operators” and that he also had issues with other tenants that could cause difficulties in the coming quarters. However, the healthcare company added cash to its business with more than $300 million in net proceeds from the sale of certain legacy assets on the Gulf Coast. And despite the headwinds it faces, management noted that portfolio occupancy levels have improved as concerns over the omicron coronavirus variant have subsided.
How secure is the return?
The message seems mixed from the CEO. At the very least, there could be hiccups along the way for Omega Healthcare. It is therefore important to assess the dividend today and see how much leeway it has to deal with adversity later this year.
Two key numbers investors will want to pay attention to are the company’s quarterly dividend yield and funds from operations (FFO), which are what REITs use to gauge their performance (as opposed to net income, which includes non-cash).
Currently, Omega Healthcare pays investors $0.67 per share. And for the first three months of 2022, the REIT’s FFO was $0.69 per share – very slightly ahead of the dividend. That was down a few cents from the $0.71 it reported in the year-ago period.
There certainly doesn’t seem to be much room for Omega Healthcare to sustain its dividend if costs continue to rise due to inflation. And the company has been cautious with its payouts, not increasing them since 2019.
Should you buy Omega Healthcare for its dividend?
The big question that income investors are likely to have about Omega Healthcare is the actual security of the stock payout, as that will likely be the main reason to consider this stock in the first place. There are many high yielding stocks, but not all of them are sustainable.
The company’s gain on asset sales likely gave Omega Healthcare a bit more time before it had to make a decision; net income of $195.2 million last quarter was up 19% year over year, mainly due to these one-time profits. Between that and its still slightly higher FFO than its quarterly payouts, the dividend appears to be safe for now. However, I don’t know if in a year this will still be the case.
If you’re an investor who’s willing to watch the REIT closely for signs of improvement or deterioration, this could be an income stock worth buying. But it’s definitely not an investment you should buy and forget.