A high-yielding dividend stock can certainly be enticing, especially if it's paying 7% or more. On a $25,000 investment, that would mean $1,750 in annual dividend income. However, investors need to be careful with dividends because payments are never guaranteed. If a business struggles and profits decline, management could cut or eliminate a dividend for the sake of conserving cash.
1. Sabra Healthcare REIT
Sabra should, theoretically, be a relatively safe income stock to hold. It is a real estate investment trust (REIT) that focuses on the healthcare industry, collecting rent from more than 400 properties in its portfolio, including skilled nursing and transitional care facilities, senior housing, specialty hospitals, and behavioral health facilities. These don't stand out as terribly risky tenants.
A key metric REIT investors need to consider is funds from operations (FFO). REITs use this instead of net income to assess their performance. With net income, payout ratios can often be in excess of 100% and look unsustainable as it includes depreciation and impairment charges that have no cash impact on the business and its ability to pay dividends. FFO excludes these items and gives investors a more reliable number to judge dividend payments.
For the three-month period ended June 30, Sabra's FFO per share was $0.36. That would put its payout ratio, based on FFO, at 83%. It's a high percentage, but it is certainly sustainable. However, when looking at cash flow, things look even tighter; over the past six months, the company has generated $140 million in operating cash flow, which is barely enough to cover its dividend payments of $139 million during that time frame.
Sabra doesn't have a big buffer to suggest its 7.8%-yielding dividend is safe. And the company has slashed its dividend payments in the past (in 2020, management reduced the quarterly payments from $0.45 to $0.30).
Given the risks present, Sabra isn't a dividend stock I'd feel comfortable holding right now.
2. Innovative Industrial Properties
Innovative Industrial Properties (IIP) is another REIT, but its focus is on the emerging cannabis industry. It uses sale-and-leaseback agreements to generate recurring income for itself while providing cannabis producers with an influx of cash. The company has been generating some strong numbers, with revenue of $70.5 million in the period ended June 30, rising by 44% year over year. However, its FFO per share of $1.97 puts its payout ratio at an alarmingly high rate of 89%.
The REIT's aggressive dividend hikes over the years have made it an attractive dividend growth stock to own. But with the dividend doubling in less than three years, the company may have put itself into a challenging situation with such a high payout. The positive is that at least the operating cash flow of $62.1 million last quarter was still higher than the $46.2 million that IIP paid out in dividends.
IIP's financials don't look bad -- for now. The problem I have is with the company's management failing to raise any concerns about a tenant, Kings Garden, which a short-seller report highlighted in April as a significant risk. IIP was initially dismissive of the short-seller report and downplayed it, only to eventually say in July that the tenant defaulted and that IIP has now begun legal proceedings against them.
If things can deteriorate so quickly for a key IIP tenant and the REIT's profits don't leave a huge buffer over the dividend, this is a payout that could at some point be in jeopardy. Even if IIP doesn't cut its dividend, the aggressive dividend growth rates that investors have become accustomed to may slow down or come to a halt, which, in turn, could hurt the attractiveness of the stock as that was definitely what made it an appealing buy for income investors.
Although it pays 7.3%, this isn't a dividend stock I would want to own as the cannabis industry can be risky, especially in light of recent oversupply issues, and some producers may not make ideal tenants.