Can an 8.5% Dividend Yield Possibly Be Safe?

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Over the coming decades, there are probably few businesses that will be more successful than senior housing.

More than 10,000 people per day are turning 65 as the baby boomers enter their senior years. Many will need living arrangements that help them with various activities.

Some will need full-service nursing homes. Others, independent living apartments. And still others, everything in between.

Senior Housing Properties Trust (Nasdaq: SNH) owns 431 properties in 42 states.

The company has paid a $0.39 per share quarterly dividend since 2012. It began paying a dividend in 2000, has raised it nine times and has never cut it.

Will its winning streak continue? Let’s dig into the numbers.

Growing Cash Flow

Because Senior Housing Properties Trust is a real estate investment trust, we look at funds from operations (FFO) instead of free cash flow. FFO is simply a cash flow metric that is used by REITs that takes into account sales of properties.

Senior Housing’s FFO per share has risen nicely over the last few years.

And the company has always generated plenty of cash to pay the dividend.

Wall Street forecasts FFO of $1.89 per share and $1.57 per share in dividends paid next year. It will give the company a nice cushion should anything go wrong.

Higher interest rates typically are bad news for REITs, as they cause their borrowing costs to rise. Increased interest expense can hurt future FFO growth. But those figures are likely already embedded in analysts’ forecast.

Senior Housing Properties Trust is in an industry that should grow for a few decades. It generates plenty of cash flow and has a strong 16-year record of paying and raising the dividend.

This 8.5% dividend yield is as safe a bet as a grandma asking a 30-year-old why they’re not married yet.

Dividend Safety Rating: A

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