One of my more painful investing lessons is that not all high-yielding dividends are sustainable. Several dividend stocks I've owned have slashed or suspended their once-attractive dividends at the first sign of trouble. I've therefore learned to look past the alluring yield to ensure the company can sustain its payout even during more challenging times.
Community Healthcare Trust (CHCT 2.65%) and Broadstone Net Lease (BNL -0.14%) are two big-time payouts that should endure an economic downturn. That makes them great stocks for yield-seeking investors to buy. However, one that seems suspect is Office Income Properties Trust (OPI 3.61%), which is why income investors should avoid it.
A healthy payout
Community Healthcare Trust's dividend yield currently clocks in at more than 6%. That's several times higher than the S&P 500's 1.6% dividend yield. The company's high-yielding payout is on a rock-solid foundation.
The bedrock of that belief is the healthcare REIT's diversified portfolio of income-producing properties. It owns medical office buildings, behavioral facilities, hospitals, and other healthcare facilities leased to various tenants. That diversification helps reduce risk while enhancing its ability to continue growing.
The company also has a solid financial foundation. Community Healthcare Trust has a conservative balance sheet with low leverage ratios in the 35% range. It also has a reasonable dividend payout ratio of less than 80% of its funds from operations (FFO) in the third quarter. Those features give it the financial flexibility to continue acquiring income-producing healthcare properties.
Community Healthcare has steadily expanded its portfolio over the years. That has enabled the REIT to increase its dividend every single quarter since its initial public offering in 2015. Given its solid finances, it should be able to continue increasing its high-yielding payout in the future.
A rock-solid income stream
Broadstone Net Lease also offers a dividend yielding more than 6%. That big-time payout is also on a very sustainable foundation.
A big driver is the diversified REIT's strong portfolio of income-producing properties. The company's portfolio includes industrial (49%), healthcare (18%), restaurant (14%), retail (12%), and office (7%). The REIT leases these properties to high-quality tenants under long-term net leases with annual rental escalation clauses.
Broadstone Net Lease also has a strong investment-grade balance sheet and a conservative dividend payout ratio. That gives it the financial flexibility to continue growing its portfolio. Those future portfolio additions should enable Broadstone to increase its big-time payout.
Too much uncertainty
Office Income Properties Trusts entices investors with a dividend yield of more than 15%. At first glance, that monster payout seems to be on solid ground. The company has a diversified office portfolio by geography, tenant, and industry. Meanwhile, 63% of its rents come from investment-grade rated tenants, suggesting they have the financial fortitude to continue paying rent if economic conditions deteriorate. On top of that, the company has investment-grade credit and a conservative dividend payout ratio of 67% of its cash available for distribution.
However, the market is concerned about whether Office Income Properties can sustain its big-time payout. That's because it has significant upcoming lease expirations (14% in 2023 and 14.4% in 2024). Given the shift toward hybrid working environments, investors worry that it won't be able to lease all that space at attractive rates. That could force the office REIT to reduce its dividend.
Office Income Properties Trust has been taking steps to get out ahead of this problem. It's working hard to sign new leases at attractive rates. It has also been reshaping its portfolio through capital recycling. The REIT has been selling older properties in secondary markets to invest in newer properties in primary markets to enhance its ability to maintain solid occupancy and lease rates. It has also invested capital in redeveloping older properties to improve their appeal to tenants. However, with hybrid work here to stay, it's unclear how much office space companies will need in the future. There is thus no guarantee Office Income Properties can maintain its massive dividend.
Focus on dividend stocks with the more sustainable payouts
As alluring as Office Income Properties' double-digit dividend yield might be, income-focused investors should wait and see how it manages through its upcoming lease expirations. Instead, income investors should buy shares of Community Healthcare and Broadstone Net Lease. They offer well-above-average dividend yields that are on much firmer foundations.
