Is that 9% dividend yield too good to pass up?

These days, the average interest rate you earn on a savings account is almost zero. And although interest rates are rising, you can earn a lot more by investing in dividend-paying stocks. The challenge is to find a dividend-paying stock that offers a good balance between paying a high dividend and at the same time providing sufficient security.

Sabra Healthcare REIT (SBRA -0.57%) stands out for its impressive dividend yield of 8.8%, well above the S&P500‘s yield of about 1.4%. Skeptical investors may wonder if it’s too good to be true. Can such a high dividend be safe? Let’s take a closer look at various factors.

Image source: Getty Images.

An overview of the company

Sabra is a real estate investment trust (REIT), which means it must return at least 90% of its profits to investors. Although a dividend is virtually guaranteed as long as the REIT is profitable, the question comes down to how much dividend it can afford.

In 2020, the company announced a cut in its quarterly dividend from $0.45 to $0.30 per share. This decision was made in an effort to preserve capital amid the pandemic and the uncertainty it has created. Since then, however, dividend payouts have remained stable.

Sabra has over 400 properties in its portfolio spread across the United States, including 279 in skilled nursing/transitional care facilities and over 100 focused on senior housing. The company’s focus on healthcare should make it a pretty safe stock to hold for the long haul. But as seen with the recent dividend cut, there are also risks investors need to consider before loading up on this income stock.

What Sabra’s Recent Numbers Say

There are three key numbers investors should focus on when looking at REITs: funds from operations (FFO), percentage of rents collected, and occupancy rates.

FFO is the version of a REIT’s net income that gives a more accurate picture of the leeway the company has to pay its dividend. Rent recovery percentage and occupancy rates can give investors insight into whether there are any obvious issues today that could impact earnings in the future.

Sabra’s FFO of $0.39 for the first three months of 2022 looks encouraging and is strong enough to support the company’s quarterly dividend of $0.30. Over the past few years, there have been a few outliers, but overall the REIT has generated strong enough numbers to support its current level of dividend payouts.

Its free cash flow has also been relatively strong, but there have been some periods (like the last quarter) where it hasn’t exceeded the company’s dividend payouts. So, again, there is potential risk here for investors.

Fundamental Chart

Fundamental Chart Data by YCharts

Sabra also says it collected an impressive 99.5% of projected rents from the start of the pandemic through April. The REIT also reports occupancy rates for its seven largest qualified nursing tenants, which have remained fairly stable at around 76% over the past three quarters. Although it could be higher, it was enough to allow the company to generate enough FFO to cover its payments. Overall, the numbers look good and there are no clear warning signs to suggest that another dividend cut is imminent.

Should you buy Sabra for its dividend?

Sabra’s dividend appears to be secure today as the company’s most recent per-share FFO suggests there is more than a little wiggle room between its earnings and payouts. The only caveat, however, is that interest expense of nearly $25 million last quarter was one of its biggest costs.

Although the company’s debt ratio has been declining recently, this is also another area investors should watch closely as rising interest charges could put the dividend at risk.

SBRA Debt Ratio Chart

SBRA Debt Ratio Data by YCharts

For income investors, the short answer is that the dividend is safe today and Sabra could be a good investment. But it is a stock that investors should watch carefully as rising costs could cause management to look again for ways to conserve capital, especially with the risk of a looming recession.

About Catherine Wilson

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