Intro
Let's face it, dividend plays are boring. There's no technical analysis. There's no calling tops and bottoms. There is simply buying and forgetting, and waiting and collecting. There's nothing exciting or flashy about it. That being said, they can be a good way of hedging risk, and offer a place to park dollar denominated capital you've earned through riskier means long term for an okay return (it's not DEFI I know). You don't really worry about the day-to-day movements of the stock, you simply have to do some simple fundamental analysis about once a quarter. All else being equal, if the share price drops, the dividend yield goes up. If you believe their dividend is safe, that might be a good opportunity to accumulate more. Money market and savings account yield is crappy, but you still want at least some cash set aside in them so you are not forced to sell your income producing assets if there is a short-term need for cash.
Questions you should ask are:
- Is the company in a stable and resilient industry?
- Will it still be able to pay a dividend in the event of a recession or other event?
- Can the company afford to pay the dividend?
- This is measured using the dividend payout ratio
- Will the dividend beat 2% inflation (I prefer at least 2X)?
- Is the dividend yield at least 4%?
- Does the company regularly raise their dividend?
- Does the yield remain flat or go up over time? This is referred to as dividend growth rate.
- Does the company have a long history of paying dividends?
- Are the payouts reliable over time?
UHT
Now that we've asked these boring questions, we can take a look at an example of a boring dividend stock, $UHT.
According to their website:
Universal Health Realty Income Trust is a real estate investment trust specializing in healthcare and human service related facilities. The Trust commenced operations on December 24, 1986. As of March 1, 2020, the Trust has seventy-one investments in twenty states, including acute care hospitals, medical office buildings, rehabilitation hospitals, sub-acute care facilities, freestanding emergency departments and childcare centers.
$UHT is a Real Estate Investment Trust (REIT), which are required to pay 90% of their earnings back to shareholders. These are nonqualified dividends, meaning you pay the full income tax rate according to your tax bracket, rather than capital gains. The good news is if you hold it within a retirement account, you don't have to pay tax on the dividends when they are paid out, but rather pay taxes based upon the type of retirement account (IRA, ROTH, 401K, etc.).
Are They Resilient?
Is UHT in a stable and resilient industry? Let's take a look...
So UHT invests in medical-related real estate, so it's not really diversified at all. But I think we can all agree, that with an aging population, that medical facilities will be one of the safest bets going forward.
From the map, we can see that UHT is somewhat diversified in terms of geographical markets they hold real estate in.
Can They Afford It?
The payout ratio for UHT is 184.37% according to E*Trade. This should be cause for concern, because UHT is payed out 84% more than they took in for earnings. It falls upon us to ask why, and whether or not this causes to future dividends to be in jeopardy. It could be they sold some property for a profit or had a related event.
If you take a dive into their Form 10-Q from September, they address this very concern.
From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs...
We don't have their 10-Q addressing their latest payout yet, but we should take a look at it once released and re-evaluate at that time. Last quarter their cash flow exceeded their dividend payout by over 4.4 million.
Does It Beat Inflation?
With a current dividend yield of 4.51%, UHT exceeds inflation by a comfortable margin. This assumes 2% inflation, which assumes a 'healthy' rate of inflation. If there is hyperinflation in future, all bets are off, and it might be time to re-evaluate.
Do They Regularly Raise Their Dividend?
According to their website, their 5-Year annual dividend growth rate is 1.54%. This isn't particularly earth shattering, but at least shows their dividend is growing over time. This level of growth makes me want to pay attention to the yield over time.
Dividend History
Last but not least, we can see dividend history via their website below. They have consistently paid out dividends since 1997, and they have consistently raised those dividends year-over-year. The head and the tail of their chart is listed below, but their history extends to 1986. Here we have a 25-year documented history of consistent payouts, and consistent growth.
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Thanks for reading. This blog post is solely my opinion, and is not represent a recommendation to buy anything.
Source of images: http://www.uhrit.com/