Is this 8.8% Dividend Yield Too Good to Be True?

A dividend yield far above 5% usually warrants a closer look. For many investors, they'll usually scoff at the yield and assume it isn't sustainable and is due for a cut. But that isn't always the case. Real estate investment trust (REIT) Omega Healthcare Investors (NYSE:OHI) currently pays a generous dividend yield of 8.8%. That's significantly higher than the 1.3% payout that you're collecting with the average stock in the S&P 500.

The big question for investors is how risky this dividend is. Omega is in the senior care housing business and that can be particularly risky, especially with COVID-19 cases again on the rise. The company last reported its earnings on August 2 where its adjusted funds from operations totaled $0.85 per share. That's well above its quarterly dividend of $0.67, putting its payout ratio based on that metric at 79%. REITs have to pay out 90% of their earnings back out to shareholders – although that earnings figure was an adjusted calculation. Omega's actual per-share profit for the period was just $0.36.

There are some concerns with the business as CEO Taylor Pickett stated in the earnings release that “facility occupancy improved in the quarter but still sits meaningfully below pre-pandemic levels, and as a result, many operators continue to rely on federal and state government support. With the industry focused on protecting their frail and vulnerable residents, we are hopeful that this support will continue."

The positive is that the company said for the month of July, it collected 98% of (contractual) rent payments. Although rent collection remain strong, investors will want to keep a close eye on Omega's dividend given the lower occupancy rates and the dependence from some operators on government support.