Dividend stocks play an important role for investors. The steady income they offer receives favourable tax treatment, and puts money in our pocket today. In this article, I would like to discuss Northwest Healthcare Properties REIT (TSX:NWH.UN), a recession-proof 7.3% dividend stock.
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Steady dividend income – theoretically
Northwest is the owner and operator of a portfolio of medical office buildings and healthcare real estate. The revenues from these real estate assets are pretty much sheltered from the ups and downs of the economic cycle because they are in the business of healthcare – a steady, stable, growing business.
Also, these real estate assets are characterized by long leases and they’re inflation-protected. In fact, the current weighted average lease expiry is 13.6 years, and 84% of leases are subject to rent indexation.
This investment profile is what brought me to Northwest Healthcare REIT many years ago. And for many years, this dividend stock did provide steady and reliable income in my RRSP portfolio. But then, the perfect storm began to brew.
Why the volatility
As you can see from Northwest Healthcare’s stock price graph below, things have not played out as I had expected. In fact, Northwest got into trouble in 2023, and this culminated in a more than halving of its dividend and stock price.
But what happened?
Well, it’s quite simple. The global opportunity for healthcare assets was positive, as the aging population and increased healthcare spending fundamentals were playing out in many developed countries around the world. And Northwest saw the opportunity and embarked on an aggressive acquisition strategy. The company leveraged up to fund these acquisitions, and this brought trouble.
In 2023, interest rates rose fast, and this created an impossible situation for Northwest, which was unable to fund rising interest payments from its overleveraged balance sheet. So, it all fell apart and Northwest had to slash its dividend and reset the business by divesting of assets.
What’s ahead for this dividend stock and why it presents a compelling opportunity today
All of this understandably scared away investors who, to this day, are still shying away from the stock. But today, Northwest is on a better path forward. One that I think will allow it to once again reap the rewards of being the defensive dividend stock that it is.
New management at Northwest has a clear plan: simplify the business, strengthen the balance sheet, and grow earnings. The most recent results show that this plan is bearing fruit and the company is getting back in good standing.
For example, Northwest’s same property net operating income increased 4.5% to $73.8 million. Also, adjusted funds from operations held steady at $0.10 despite more than $260 million in dispositions. Importantly, the payout ratio is currently 92% compared to 105% last year. Finally, debt continues to decline, effectively improving the state of Northwest’s balance sheet. Interest expense fell to $35 million from $55 million last year due to a lower debt balance and lower interest rates.
So, things are definitely coming together and Northwest has come full circle, having being upgraded to investment grade by Morningstar and DBRS. But I feel like investors are still wary of this dividend stock, despite its many very appealing defensive attributes and its turnaround. But this is an opportunity. While we wait for investors to see the improvement, we can get in on this defensive dividend stock on the cheap.
The bottom line
With a 7.3% dividend yield and monthly payments, Northwest is an extremely attractive dividend stock. This income is protected from the ups and downs of the economy and benefits from the stability of the healthcare industry.
