Rates are lower. Economic risks are higher. And consumers and savers are strapped for cash. Thankfully we have dividend stocks like Northwest Healthcare Properties REIT (TSX:NWH.UN). It’s yielding a very generous 7.4%. It pays out monthly. And it’s pretty defensive.
Let’s explore.
Why this dividend stock?
The jobless rate came in at 6.8% in November, an eight-year high and a cause for concern. But what does this have to do with Northwest Healthcare Properties? Well, a lot.
You see, Northwest is the owner and operator of a portfolio of medical office buildings and healthcare real estate. This means that by definition, its business is not economically sensitive. Demand for healthcare assets is affected by the population’s healthcare needs. And this is something that Northwest has going for it.
We all know that the population is aging. This will drive demand for Northwest’s real estate because as we get older, we require more healthcare. So that’s the first point. Beyond this, the very nature of these assets is that they are characterised by long-leases and inflation-indexed. This makes the cash flow profile of these assets quite stable and predictable. In Northwest’s case, the REIT’s weighted average lease expiry is currently 13.4 years, its occupancy rate is 96%, and 84% of the leases are subject to rent indexation.
But Northwest has had its problems
Despite the defensive nature of Northwest’s assets, the company did get into some trouble in its recent history. But this was a function of an overly aggressive acquisition strategy. This was financed largely through debt, and when interest rates started rising, Northwest was caught in a bad spot.
So, the company proceeded to cut its dividend (obviously not a good thing), sell off non-core holdings, and restructure its debt. Today, the REIT has emerged as a better and stronger company. For example, its dividend is covered by its cash flow from operations.
Also, its leverage ratio was 43.6% at the end of its latest quarter, compared to 47.7% in the prior year. In fact, the company continues to pay down its debt, with a focus on its most expensive debt. The weighted average interest rate on its debt as of September 30, 2024 was 5.6%, compared to 6.3% at December 31, 2023.
Finally, there’s new management in charge and their goal is to enhance operational efficiency.
The bottom line
I’d like to finish off by going back to the jobless, or unemployment rate, that was announced today. An environment wherein consumers are struggling is something we haven’t seen in a long time. In fact, the consumer has been the economic engine for quite some time. If we are seeing a reversal of consumer power, we must look to the more defensive stocks for our portfolios.
Northwest Healthcare Properties is well positioned to weather the economic storm, and it’s looking more and more attractive again as it cleans up its act. The eight-year high unemployment rate helps drive home the fact that we need to beef up on our defensive stocks. A generous and reliable monthly dividend income stream couldn’t come at a better time. With a consistent stream of monthly dividend payments, this dividend stock can provide its shareholders with that extra cash every month.
