Could This Stock's 9.9% Dividend Yield Be a Golden Ticket?

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Differences in dividend yields can have a significant impact on your portfolio. If you were to invest $25,000 into the average stock in the S&P 500 that yields 1.4%, your annual dividend income would total $350. If instead, you invested in a stock that pays 5%, then your income would total $1,250.

A stock that pays an even higher yield is Omega Healthcare Investors (OHI 3.06%). At 9.9%, the yield could bring in close to double the income you’d collect from a 5%-yielding stock. And although it looks too good to be true, its dividend may actually be safe.

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The company’s business is diverse and focused on a stable segment

Omega Healthcare is a real estate investment trust (REIT), and as long as its tenants are paying their bills, the dividend should be safe.

The REIT boasts a diversified portfolio that features more than 930 operating healthcare facilities with locations across the U.S. and the U.K. Specifically, it focuses on investing in senior care, in facilities that should have no trouble with demand as baby boomers retire and as seniors account for more of the population — by 2030, all baby boomers will be 65 or older. But although there are long-term opportunities in senior care, it’s the near term that is the concern for investors.

The company last reported earnings on May 2. CEO Taylor Pickett acknowledged that there were nonpayments “by a few operators” and that it also has issues with other tenants that could result in challenges over the next few quarters. However, the healthcare company added some cash to its business with more than $300 million in net proceeds from the sale of some legacy assets on the Gulf Coast. And despite the headwinds it’s facing, management noted that portfolio occupancy levels have improved as concerns about the omicron coronavirus variant have subsided.

How safe is the yield?

The message appears to be mixed from the CEO. At the very least, there could be some hiccups along the way for Omega Healthcare. That makes it important to evaluate the dividend today and to see just how much room it has to handle adversity later this year.

Two key numbers that investors will want to pay attention to are the quarterly dividend yield and the company’s funds from operations (FFO), which is what REITs use to assess their performance (as opposed to net income, which includes non-cash items). 

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 — ever so slightly ahead of the dividend. That was down a couple of cents from the $0.71 that it reported in the prior-year period.

There definitely doesn’t appear to be a whole lot of room for Omega Healthcare to support 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 income investors are likely asking about Omega Healthcare is how safe the stock’s payout really is, since that’s probably going to be the main reason to consider this stock in the first place. There are plenty of high-yielding stocks out there, but not all of them are sustainable.

The company’s gain on asset sales likely bought Omega Healthcare some more time before having to make a decision; net income of $195.2 million this past quarter rose 19% year over year largely due to those one-time profits. Between that and its FFO still being slightly higher than its quarterly payments, the dividend does appear to be safe for the time being. However, I’m not sure if a year from now that will still be the case.

If you’re an investor who is willing to monitor the REIT closely to see if there are any hints of things getting better or worse, this could be an income stock worth buying. But it’s definitely not an investment you should buy and forget about.