Stocks that pay above-average dividends can accelerate your retirement portfolio, but not if they can't continue making their payments. These three healthcare stocks offer yields of 8% or better because investors are worried the nursing homes owned by their underlying businesses won't have enough paying residents.
The United States is aging so fast that the over-85 population is expected to grow from around 6.1 million in 2016 to 14.1 million by 2040. With the long-term demographic trend moving in the right direction for these real estate investment trusts (REITs), the juicy dividends they offer could be worth the risk.
|Company (Symbol)||Dividend Yield||FFO* Payout Ratio|
|Senior Housing Properties Trust (NASDAQ:DHC)||9.2%||87%|
|Sabra Health Care REIT, Inc. (NASDAQ:SBRA)||8.3%||53%|
|Omega Healthcare Investors, Inc. (NYSE:OHI)||8%||142%|
Senior Housing Properties Trust: holding steady
Senior Housing Properties Trust hasn't raised its payout since 2012, but the stock hasn't exactly climbed, either. Fear of oversaturation in the U.S. senior housing market has kept the stock price low enough that it offers a tempting 9.2% dividend yield at recent prices.
Despite its name, managing senior living communities delivered just 14% of the company's net operating income (NOI) during the three months ended in June. Successful efforts to diversify mean a larger portion of Senior Housing's NOI comes from medical office buildings (MOBs), which generate a revenue stream less easily swayed by abrupt government spending changes.
Senior Housing has moved away from managing communities and toward long-term triple-net leases that now contribute 40% of NOI. This approach allows for more predictable cash flows, because it makes facility operators responsible for variable expenses such as maintenance and property taxes.
Senior Housing's dividend has taken up 87% of FFO over the past 12 months, which means the dividend is sustainable if the bottom line doesn't fall much further. In the second quarter, NOI from MOBs and triple-net leased senior communities rose 1.8%, and 1.9% respectively. If they can continue to offset losses from the shrinking managed-community segment, this big payout has a chance to continue.
Sabra Health Care REIT, Inc.: growth spurt
When Sabra made its market debut in 2010, the REIT's portfolio consisted of just 86 investments. By the middle of 2018, Sabra's list of investments ran to 695 properties, many of which came with the all-stock acquisition of Care Capital Properties in 2017. Despite the huge increase in outstanding shares required to take on Care Capital, second-quarter adjusted FFO per share rose 7.5% over the previous year.
In the first half of the year, 64% of Sabra Health Care REIT, Inc.'s revenue was derived from nursing homes. A new patient-driven payment model expected to deliver an extra $670 million in Medicare payments to skilled-nursing facilities goes into effect next October.
Earlier this year, Sabra sold 33 nursing homes and four senior housing communities for a $143 million net gain -- not that the company needs to sell properties to meet its dividend obligation. Sabra generated $3.42 per share in FFO over the past year, but its latest payout has been set at an annualized $1.80 per share. Once all the dust from the Care Capital acquisition settles, a dividend raise could be in the cards.
Omega Healthcare Investors, Inc.: not as bad as it looks
This REIT collects rent from 67 third-party operators that run a huge portfolio of skilled-nursing facilities. And one of Omega's larger operators, Orianna, can't pay its bills.
A big writedown related to Orianna properties while they're being transitioned to new operators makes it look as if Omega Healthcare Investors can't make ends meet, but that isn't the case. This year the company expects FFO to fall in a range between $3.03 and $3.06 per share.
Omega's annualized dividend works out to around 87% of the company's full-year FFO expectations. That's a bit higher than usual for this REIT, but not unmanageable. The patient-driven payment model that benefits Sabra will work in Omega's favor as well. That makes the odds this payout will continue seem better than average.
Demographic trends are moving in the right direction for these healthcare stocks. Before you get too excited, though, it's important to remember that there are no guarantees these companies won't have to dial back their payouts in the quarters ahead.