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2 Defensive Income Plays Yielding up to 7.23% for Your 2019 Portfolio

The increased volatility in global equities this year could necessitate a flight to safety, as Canadian investors re-balance their portfolios for 2019. The good news is that there are plenty of defensive offerings on the TSX to consider for both a stable income and capital growth right now.

A steadily ageing population and higher average individual wealth in retirement greatly supports the steady growth in retirement residence and elderly care business models, while healthcare is one defensive industry that continues going strong even during economic downturns.

The following two dividend-paying stocks in these industries could offer some lucrative income yields and potential capital appreciation over the next year.

Sienna Senior Living

Sienna Senior Living (TSX:SIA) is one of Canada’s leading owners and operators of seniors’ residences with high-quality assets. It is in the process of integrating its 10 recently acquired retirement residences this year in a process that is generating double-digit increases in net operating income.

The entity’s long-term care portfolio is going strong, with an average occupancy rate of 98.7% for the most recent quarter and its retirement residence portfolio ended the last quarter on a stronger note with a same property occupancy rate of 93%, which was much better than the 91.8% average occupancy rate during the third quarter of 2018. Portfolio occupancy could continue to improve this quarter if the September 30th rate is any indication of improvement for the fourth quarter.

Sienna increased its monthly dividend payout by 2% in August this year, and the $0.077 a share paycheque yields 5.6% annually on a forward-looking basis. The dividend’s adjusted funds from operations (AFFO) payout ratio has marginally improved to 60.3% over the first nine months of 2018 from 60.5% in the same period last year.

Most encouraging is the company’s debt ratio, which declined from 51.8% last year to 48.3%, as management reduced overall leverage in a rising-rate environment. Sienna’s interest coverage ratio improved too, while the average term to debt maturity extended to five years at the end of September 2018 from 4.6 years during the same time last year.

Extending debt maturities as interest rates rise is a brilliant strategic move, as the entity gets to lock up lower financing rates for longer periods into the future, while also delaying borrowing at higher interest rates until the cheaper debt instruments mature.

I expect Sienna to generate growing earnings after 2018 acquisitions get fully consolidated into the main portfolio.

Medical Facilities

Medical Facilities (TSX:DR), in partnership with physicians, owns surgical facilities in the United States. The company has realized a sustained double-digit revenue growth rate, mainly through accretive acquisitions, but also organically through business volumes growth.

The company pays a $0.094 monthly dividend that yields 7.23% annually on a forward-looking basis, has paid 176 consecutive dividends since inception so far, and can be expected to continue doing the same in the long future due to its wide and ever-growing economic moat.

The stock has provided some capital appreciation since my last recommendation in July and has generated over 17% in total returns so far this year. There could still be some further price growth momentum left, as historical valuation multiples on the shares imply a 24.14% upside on Medical Facilities’s market valuation.

There could be some little concern on the corporation’s rising payout rate during the first nine months of this year, with a distributable funds payout rate of 86% year to date, which was higher than the 74.9% achieved during the first three quarters of last year and much further away from the 67.5% achieved for 2017. However, this was mainly due to a 23% decrease in cash available for distributions, as the company invested heavily in growing the business this year.

That said, there is a strong competitive moat in Medical Facilities’s business model that shares a common interest with physician partners, and the growing health sector will most likely weather any economic storm, as humans don’t usually give room for second thoughts where their health and well-being is concerned.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned.

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