A high-yielding dividend stock can be both alluring and scary at the same time. While it can be alluring in the sense that you can earn a high yield, it can also be all for naught if the company can't afford to make dividend payments in the future because its payout is unsustainably high. But investors should remember that a yield is just a function of the dividend paid and the current stock price -- it tells you nothing about whether or not a company can afford it.
At 6.5%, Healthcare Realty Trust (NYSE: HR) pays a dividend yield that is more than three times the S&P 500 average of 1.7%. It might appear that the dividend is too high, but is that really the case, or is this just an underrated dividend stock that's worth adding to your portfolio?
Here's what the payout ratio says
A payout ratio is much more important for investors than just the yield because it can put the total payout a company makes annually within the context of how much profit it is generating in the same period.
On March 1, Healthcare Realty released its latest earnings numbers for the period ending Dec. 31, 2022. For that quarter, it reported a net loss of $35.8 million. However, impairment losses and one-time expenses related to its merger with Healthcare Trusts of America (another healthcare-focused REIT) weighed down those results.
When looking at its normalized funds from operations (FFO), which factor out one-time and non-cash-related items, the company's adjusted earnings are a positive $0.42 per share for the quarter. That leaves plenty of breathing room above the company's quarterly dividend of $0.31, implying a payout ratio of 74%.
If investors were to simply look at negative earnings per share, they might otherwise think the dividend was in trouble. But based on the FFO figure, it certainly paints a different picture for the business.
The stock doesn't look so bad when compared to its peers
In the past 12 months, shares of Healthcare Realty Trust have declined 30%. But that isn't as bad as some of its peers, including Medical Properties Trust (NYSE: MPW) and Healthpeak Properties (NYSE: PEAK), a couple of other healthcare REITs -- they have crashed 56% and 33%, respectively. Here again, the relevant context helps to show that while Healthcare Realty's stock hasn't been doing well of late, its performance isn't all that bad, given how some other healthcare REITs have fared.
REITs simply haven't been popular places to invest in as interest rates have been on the rise, and that's because they typically carry a fair amount of debt. Healthcare Realty has a debt-to-equity ratio of 0.72, and that, too, is better than Medical Properties (1.2) and Healthpeak Properties (0.98).
Is Healthcare Realty a buy?
For dividend investors, Healthcare Realty is definitely an income stock you should consider adding to your portfolio. Although the company's recent results don't look great and its payout ratio looks high, those are all reasons why investors could be underestimating the stock and wrongly assuming the dividend is due for a cut.
The company's financials should improve, and analysts expect that -- Healthcare Realty is trading at just 11 times its future earnings (versus 38 of its trailing profits). Anytime a company is coming off a merger, there will be some additional costs that will weigh on its business, at least temporarily. But getting larger and more diversified can help make the company a better buy in the long run.
With a payout ratio that looks safe right now and Healthcare Realty trading near its 52-week low, now may be an opportune time for contrarian investors seeking a dividend to load up on this beaten-down stock.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Healthpeak Properties. The Motley Fool has a disclosure policy.
