These days, the average interest rate you're earning in a savings account is next to nothing. And although interest rates are rising, you can make a lot more by investing in dividend stocks. The challenge is in finding a dividend stock that strikes a good balance between paying out a high dividend and at the same time offering sufficient safety.
Sabra Health Care REIT (SBRA 0.32%) stands out for its impressive dividend yield of 8.8%, which is well above the S&P 500's yield of about 1.4%. Skeptical investors may wonder if it is too good to be true. Can a dividend this high be safe? Let's take a closer look at various factors.
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An overview of the business
Sabra is a real estate investment trust (REIT), which means that it needs to pay out at least 90% of its profits back to investors. Although a dividend is all but guaranteed as long as the REIT is profitable, the question comes down to how much of a dividend it can afford.
In 2020, the company announced a cut of its quarterly dividend from $0.45 to $0.30 per share. The move was made in an effort to preserve capital amid the pandemic and the uncertainty it created. Since then, however, the dividend payments have remained stable.
NASDAQ: SBRA
Key Data Points
Sabra has more than 400 properties in its portfolio spread across the U.S., including 279 in skilled nursing/transitional care facilities and 100-plus focused on senior housing. The company's focus on healthcare should make it a fairly safe stock to hold on to over the long haul. But as seen with the recent dividend cut, there are also risks investors need to consider before loading up on this income stock.
What Sabra's recent numbers say
There are three key numbers investors should focus on when looking at REITs: funds from operations (FFO), percentage of rents collected, and occupancy rates.
FFO is a REIT's version of net income that gives a more accurate picture of how much room the company has to pay its dividend. Percentage of rent collection and occupancy rates can give investors an insight into if there are any problems evident today that could impact earnings down the road.
Sabra's FFO of $0.39 for the first three months of 2022 looks encouraging and is strong enough to support the company's quarterly dividend of $0.30. Over the past few years, there have been some aberrations, but generally the REIT has been generating strong enough numbers to support its current level of dividend payments.
Its free cash flow has also been relatively strong, but there have been some periods (such as the most recent quarter) where it wasn't higher than the company's dividend payments. So again, there is some potential risk here for investors.
Fundamental Chart data by YCharts
Sabra also says it has collected an impressive 99.5% of forecast rents since the start of the pandemic through April. The REIT also reports occupancy rates for its seven largest skilled nursing tenants, which have been fairly stable at around 76% for the past three quarters. Although it could be higher, that's been sufficient to allow the company to generate enough of an FFO to cover its payouts. Overall, the numbers look good, and there aren't any glaring warning signs to suggest that another dividend cut is around the corner.
Should you buy Sabra for its dividend?
Sabra's dividend looks to be safe today as the company's most recent FFO per share suggests there's more than a little breathing room between its profits and payouts. The one caveat, however, is that interest expense of nearly $25 million last quarter was one of its largest costs.
Although the company's debt-to-equity ratio has been falling recently, this too is another area that investors should keep a close eye on as rising interest costs could put the dividend in jeopardy.
SBRA Debt to Equity Ratio data by YCharts
For income investors, the short answer is that the dividend is safe today and Sabra could make for a good investment. But this is a stock that investors should monitor carefully because rising costs could push management to again look for ways to conserve capital, especially with the risk of a recession looming.
