A steady and reliable passive-income stream: it’s the dream that many of us strive for. It promises worry-free nights, financial flexibility, and a life of financial security. Dividend stocks can help us achieve this dream. But with so many to choose from, it may seem daunting.
But let’s get started by considering Chartwell Retirement Residences REIT (TSX:CSH.UN), Canada’s largest provider and owner of seniors housing communities from independent living to long-term care.
After the pandemic: A 6.45% dividend yield rooted in strong secular trends
Retirement homes and senior living settings have come under intense pressure in the last three years. This resulted in significantly lower occupancy rates and cash flows as well as huge staffing shortages. It also resulted in a 32% decline in Chartwell’s stock price over the last three years.
Yet despite all of this turmoil, the dividend has remained intact. This demonstrates management’s commitment to it, as well as their belief that the business will rebound as the pandemic resolves. And this is what is, in fact, happening. After falling sharply in 2021 and 2022, revenue and earnings are heading sequentially higher.
Let’s take the latest reported quarter, the third quarter (Q3) of 2022. While revenue declined sharply versus the same quarter last year, occupancy is rising. In fact, it rose 60 basis points in the quarter, with another 40-basis-point increase in October. This translates into an occupancy rate of 77.7% in September and 78.1% in October. While this is a far cry from rates of above 90% before the pandemic, the point here is that it’s heading in the right direction.
The positive long-term secular trends remain, as the biggest demographic trend at work today is the aging population. Despite covid-related challenges, demand for retirement living and senior care are poised to continue to rise over the next many years.
Passive income: Sustainability of the dividend
The question of dividend sustainability is top of mind these days, especially for a company like Chartwell. I mean, this is a capital-intensive business — one that’s been financed in a big way through debt. Now that interest rates are higher and heading even higher, what impact will this have on Chartwell’s financials?
As of the end of last quarter, Chartwell was in an acceptable liquidity position of $182 million, including $25 million in cash and cash equivalents. Also, mortgage maturities are staggered over an average of 6.2 years. The company’s dividend is well above 100% of income, but its cash flow covers it — it’s not perfect but acceptable for now, in my view.
Rising interest rates are a negative for Chartwell, as there’s a heavily reliance on debt. But by the same token, higher rates will mean higher interest income for seniors. This can translate into better affordability for seniors looking into a retirement residence.
Strong outlook for CSH.UN
Pandemic problems notwithstanding, Chartwell Retirement Residences are meeting a clear need for the Canadian population. People need help and care, as they head into their senior years, and Chartwell is a good option to provide this.
Going forward, Chartwell’s priorities are to increase occupancy in its residences and to solve the staffing crisis. Management is deploying many resources to achieve these goals, and they expect to see the fruits of this labour in the next couple of years.
In the meantime, investors who are looking for passive dividend income should consider this 6.45%-yielding dividend stock, CSH.UN.
