Omega Healthcare Investors Is A Stable Dividend REIT With A 9.3% Yield
Omega Healthcare Investors (OHI) is a large $6.77 billion market cap REIT (real estate investment trust) that invests its assets in the long-term healthcare sector. They focus on buying properties in the skilled nursing and assisted living arena run by large operators in this space. They pay out 90% of their income, as REITs are required to do. As a result, OHI stock has a 9.3% dividend yield.
Its dividend has been very stable over the past 2.5 years as it paid 67 cents quarterly or $2.68 annually. This is a result of the very profitable triple-net leases it has with these assisted-living operators. Analysts project its earnings this year will reach $2.93, and $3.03 in 2023.
So, its dividend is well covered by earnings and shareholders benefit from the growth in this fairly recession-proof industry. Moreover, the company started repurchasing its own shares last quarter to the tune of $27 million. And it recently announced that it bought back $106 million of shares in April. These repurchases will help increase the dividend per share given the same amount of dividend cost to the company.
The company said that despite several of its operators failing to pay rent due to Covid and Omicron impacts they still made enough cash flow to cover their dividend. Their Adjusted Funds from Operations (AFFO) was 71 cents per share in Q2, which is higher than its 67 cents dividend.
As a result, we can expect that the $2.68 dividend will be reasonably stable, even if there is a major recession. That means we can count on the 9.3% dividend yield going forward. Given this stability, OHI stock is ideal as a covered call income play to enhance income to the investor.
Covered Call Income
As an example, look at the out-of-the-money call options priced for Sept 16 expiration. The Barchart table below shows that the $31 strike price calls for expiration on Sept. 16 have an attractive 60 cents premium.
This means that an investor who buys 100 shares of OHI stock for $2,879 (at $28.79 per share as of June 30), can sell one out-of-the-money call option at the $31.00 strike price and receive $60 immediately. That works out to a yield of 2.084% (i.e., $60/$2879) on the investor’s investment.
Let’s annualize that yield. For example, there are 4.74 turns of 77 days in a 365-day year. So if we multiply 2.084% by 4.74x, we get an annualized yield of 9.88%. In other words, if we can repeat this yield income 4.74 times, and hold the call options until they expire unexercised we can make an additional 9.88% on top of the 9.3% dividend income.
Note that there is a huge volume of calls at $30, so I suspect that many investors expect to see the stock rise to over $30 before Sept. 16. That is one reason why I chose the $31 strike price – in order to increase the chance that these calls won’t be exercised. But even if the stock rises over $31 on or before Sept. 16, the investor still will make 7.68% from the capital gain. However, his total return will be close to 10%, including the covered call income received. He can then either reinvest in OHI stock at a higher price or find another play.