Some dividend investors look for recession-proof businesses to ensure that their dividends will be paid even if there is a slowdown in the economy.
That’s one reason income seekers are attracted to Omega Healthcare Investors (NYSE: OHI).
Omega Healthcare Investors is a real estate investment trust, or REIT, that owns skilled nursing and assisted living facilities.
More than 1 million people live in assisted living in the United States, and that number is likely to increase.
There are currently 63 million Americans age 65 or older. That figure is projected to grow 23% to 78 million by 2040, so this is certainly a growth industry.
It’s important to note that Omega Healthcare doesn’t operate these nursing homes. It doesn’t have to worry about new Medicare laws, rising food prices, or labor costs.
It is the landlord to the operators. As long as these businesses are able to make rent every month, Omega Healthcare gets paid.
The company has more than 1,100 facilities in the U.S. and U.K. that can house more than 102,000 seniors.
I used adjusted funds from operations, or AFFO, to measure Omega Healthcare’s cash flow and determine its dividend safety.
Last year, the company generated $946 million in AFFO, compared with $778 million the prior year and $730 million in 2022. That’s important because the Safety Net model considers one- and three-year growth.
With REITs, we want to be sure that the amount paid in dividends is 100% or lower of AFFO, which it is.
Last year, Omega paid shareholders $780 million in dividends, so AFFO easily covered the payment with a payout ratio of 82%.
This year, I estimate the company’s AFFO will total $1.02 billion. Dividends paid should be around $852 million. Again, the company’s AFFO should easily be larger than the amount paid in dividends, with plenty of room to spare.
Omega Healthcare Investors had been a Perpetual Dividend Raiser for more than 15 years until it froze the dividend in 2020 during the pandemic. It hasn’t grown the dividend since.
The current dividend stands at $0.67 per share each quarter, or $2.68 a year, giving the stock a robust 6% yield – another reason dividend investors like the stock.
Given the company’s growing cash flow – which is more than enough to pay the dividend – and its stable dividend history, the risk of a dividend cut is very low.
Dividend Safety Rating: A
— Marc Lichtenfeld
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