Dividend investors might rightly want to question companies with yields north of 5%. In many cases, there are considerable risks surrounding those payouts. But in some cases, it could signal opportunity.
Both Omega Healthcare Investors (OHI) and Lumen Technologies (LUMN) pay their shareholders an incredibly large yield of over 9% per year. On a $10,000 investment, that could mean more than $900 per year just in dividends. These yields, although not risk free, could well offer two good opportunities for dividend investors.
1. Omega Healthcare Investors
If you were look at Omega Healthcare’s payout ratio, which sits at over 100%, you might immediately discard this dividend stock as too risky. And that’s an easy mistake to make with real estate investment trusts (REITs). REITs assess the health of their dividend payments using funds from operations (FFO).
For the period ended Dec. 31, Omega Healthcare’s earnings per share were just $0.14 — far below the $0.67 it is paying out in dividends every quarter. However, when looking at the company’s adjusted FFO figure, the per-share profit jumps to $0.77. This calculation adds back to earnings such items as noncash provisions for credit losses and stock-based compensation. Those are expenses that, while they drag down earnings, may not necessarily hamper the company’s cash flow and its ability to pay dividends.
The company’s revenue even increased in 2021, rising 19% to $1.06 billion from the $892 million that it recorded in the previous year.
But while this REIT, which focuses on senior care facilities, has performed well, there is admittedly some risk here. The company isn’t providing guidance for 2022 due to the uncertainty relating to COVID-19, and it also says that some of its operators rely on government support, which isn’t guaranteed to continue in the future. Moreover, this is not a stock for growth investors. Over the past five years, Omega’s stock has been down around 10%.
But the company’s financials are stable and the dividend is generous at an incredibly high yield of 9.4%. Of course, investors shouldn’t assume that it will stay that way for years. This is a healthcare stock you’ll want to keep close tabs on — but as long as you aren’t making unrealistic expectations for it, it can be an excellent source of dividend income.
2. Lumen Technologies
Lumen Technologies stock pays an even higher dividend yield, one that’s now over 10%. Part of that reason is that its shares have crashed more than 20% year to date, which is much steeper than the S&P 500‘s fall of 7%. With such a drastic drop in price, that pushes the yield up as a result; prior to the sell-off, Lumen’s yield was still high, but it was less than 8%.
The reason for the bearishness is that earlier this month the company released its year-end results. In particular, it was its guidance that was a concern for investors. The telecom company, previously known as CenturyLink, isn’t coming off a bad year — its sales of $19.7 billion in 2021 were down 4.9%, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $8.4 billion was relatively similar to the earnings it reported in the previous year.
Like Omega, Lumen hasn’t offered investors much in the way of growth. Annual sales are now around $20 billion vs. more than $23 billion back in 2018 — and its stock has fallen 59% over the past five years. But with the company upgrading its network and moving away from copper and more toward fiber (which is faster), that can help drive more growth for the business and make it a more promising one to hold moving forward.
For this year, Lumen projects its adjusted EBITDA will fall to between $6.5 billion and $6.7 billion. A large part of that decline (roughly $1.7 billion) comes from the company divestment of assets it doesn’t see as key to its future growth. The company is streamlining its business, and management noted on its recent earnings call that there will be related “separation costs and dis-synergies which will impact near-term results” as a result of those divestitures.
Yet, even with the drop in adjusted EBITDA, the company expects its free cash flow to be at least $1.6 billion for the full year. Lumen normally pays around $1.1 billion in dividends each year, and so at that rate, the payout may be sustainable, even with the drop in profitability. That could make the stock’s high yield a great opportunity for investors to secure a solid payout.
There’s never any guarantee with dividends, and if Lumen performs worse than it expects, it’s possible that a dividend cut takes place. However, based on today’s data and projections, it doesn’t look like that should happen. As with Omega Health, the dividend yield looks safe for now, but investors shouldn’t take it as a given. However, that should also be the approach with most dividend stocks anyway.
While their yields looks high, both Omega Health and Lumen could be underrated investment options for income-oriented investors this year.
Originally published on Fool.com
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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