Spring Cleaning My Income Portfolio, Part II

by Dividend Growth Investor | March 28, 2013 1:00 am

As part of my dividend strategy[1], I invest in companies that grow distributions every year. I do like to see companies whose dividend growth at least matches the rate of inflation. For such companies, the yield better be much higher than my minimum requirement of 2.50% however. Otherwise, allocating funds to these securities might not be the most optimal allocation of my money. I do follow a tiered approach[2] to portfolio management, where I own shares in companies with different yield and growth characteristics, which together fusion into a portfolio whose annual dividend growth is expected to be around 6%.

A few months ago[3], I started reassessing several of the holdings I held in my portfolio. In general, companies that slowed down on their distributions increases since the time of my purchase looked like excellent candidates for review. Currently, there is a very high amount of yield chasing going on by income starved retirees. In addition general stock prices are nearing all-time-highs. It looks like now is the perfect time to dispose of companies with high yields and very slow distributions growth.

One company whose stock I recently sold was Universal Health Realty Income Trust (NYSE:UHT[4]). This REIT invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. Universal Health Realty Income Trust is also a dividend champion[5], which has managed to boost distributions for 26 years in a row.

The distributions were not growing very quickly however, but the stock had increased from my purchase price in the mid 30’s from several years ago. In my previous analysis[6] of the stock, I mentioned that half of the company’s revenues are generated from a related party, which is a little concerning. With current yields around 4.30%, the REIT looked overvalued relative to other REITs. The five year dividend growth was 1.40% annually. I researched a few REITs, and decided to equally reinvest the sale proceeds in two other trusts: Digital Realty (NYSE:DLR[7]) and Omega Healthcare (NYSE:OHI[8]).

Digital Realty engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. I liked the fact that the company was focused on growing FFO, and also growing dividends to shareholders. The company is in expansionary mode, which should bode well for FFO per share over time, particularly given low interest rate costs on intermediate-term bonds. I also liked the fact that there is tenant diversification, which also spans across several continents. The top 10 tenants are responsible for 35% of revenues. The occupancy rate ranged between 94% and 95%, which is pretty impressive. This REIT went public in 2005, and has raised distributions every year since that event. The five year dividend growth is 20.60% annually. Digital Realty Trust currently yields 4.70%.

Omega Healthcare Investors invests in healthcare facilities, principally long-term healthcare facilities in the United States. The company had managed to boost distributions since 2003, and will soon join the ranks of dividend achievers. Over the past five years FFO per share has increased from $1.30 in 2008 to $2.06 in 2012. I also liked the company’s plans to expand FFO per share through new investments. One thing that worried me about Omega Healthcare Investors was the dividend cut and subsequent elimination in 2000 – 2001. The dividend was not reinstated until 2003.

It takes a lot to reduce my fears of dividend cuts, especially if it has happened before. After reviewing occupancy trends, FFO payout of 87.40%, planned and past investments in properties, in addition to the debt profile of the REIT, I do not think that distributions are at risk. Occupancy is around 84%, which is an increase over the 80% occupancy in 2001. The top ten tenants generate 64% of revenues. And there isn’t any significant debt maturing until 2020, although there is $102 million in debt that needs to be paid in 2015. The five year dividend growth is 9.40% annually. Omega Healthcare Investors currently yields 6.20%.

I have already analyzed Omega Healthcare Investors and Digital Realty Trust prior to my transactions. I plan to post these more detailed analyzes for readers to enjoy in a few weeks.

Full Disclosure: Long OHI and DLR

Endnotes:
  1. my dividend strategy: http://www.dividendgrowthinvestor.com/2012/01/my-dividend-retirement-plan.html
  2. a tiered approach: http://www.dividendgrowthinvestor.com/2010/04/three-dividend-strategies-to-pick-from.html
  3. A few months ago: http://www.dividendgrowthinvestor.com/2013/01/spring-cleaning-my-dividend-portfolio.html
  4. UHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=UHT
  5. a dividend champion: http://www.dividendgrowthinvestor.com/2011/02/dividend-champions-best-list-for.html
  6. my previous analysis: http://www.dividendgrowthinvestor.com/2010/04/universal-health-realty-income-trust.html
  7. DLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLR
  8. OHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=OHI

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