Sabra Healthcare (SBRA 0.13%) is offering investors a hefty 9.5% dividend yield today. That should attract the attention of most dividend-focused investors, but it should also raise some concerns. Why is that yield so high?

In the wrong place at the wrong time

In 2020, Sabra cut its dividend, which was not unusual in the healthcare real estate investment trust (REIT) space. The reason for the cut was pretty simple: The REIT generates a significant portion of its rents from senior housing assets, particularly from nursing homes. When COVID-19 first started to spread, it was most deadly for the elderly with additional medical conditions, and it spread most easily in group settings. Nursing homes were, as you might expect, hit very hard.

A nursing home with many people in it and a nurse helping a resident in the foreground.

Image source: Getty Images.

You can't blame management for that or for taking the steps necessary to ensure that the REIT had the free cash it needed to muddle through a very difficult time for the industry. That said, the dividend, which is now at $0.30 per share per quarter, has yet to be increased following the cut. So while things are getting better at the business level, that clearly hasn't been enough to convince the company that the headwinds have gone away.

Notably, Sabra's third-quarter adjusted funds from operations (FFO) amounted to $0.34 per share. If you divide the dividend by the adjusted FFO to get the payout ratio, which is roughly 88%, you can start to see why the board hasn't been willing to raise the payment. Indeed, 88% is rather high. This is one reason why Sabra's dividend yield is elevated today, with the 2020 dividend cut adding to the negative sentiment.

A tough business

The other problem for investors is more basic to the business model. Nursing homes are generally paid for by third parties, including Medicaid, Medicare, and insurance. The first two are the most prominent and the cash they disperse comes from the government. In the past that's resulted in sizable (and negative) changes to the payments nursing homes have received. Nursing homes have little choice but to accept what they get. Although the risk here may be oversold, investors are generally leery of the space for this reason.

That dynamic acts as a headwind for the shares and is another reason for the high yield. That said, there's a flip side to this equation. Because of these concerns, REITs like Sabra can usually buy nursing home assets at attractive prices, which leads to high returns on their investments. Which, of course, means that Sabra can pay out bigger dividends. That model worked fairly well until the pandemic, an event which nobody could have predicted.

Sabra's yield is extra high today for a number of reasons, but when all is said and done, it will likely always have an above-average yield. Income investors are making a risk-reward call here that the government won't upend the nursing home sector with massive payment changes. For more adventurous types, that might be a worthwhile trade-off given the huge 9.5% yield. 

No rush

Sabra Healthcare is not a bad REIT and it would be unfair to characterize it as such. However, it was in the wrong place at the wrong time when the pandemic began because it operated a business that was already considered a bit risky. Until management proves that things are getting materially better, which it can show via a dividend increase, most dividend investors should probably keep this name on their watch list.