Dividends are never, ever guaranteed. And in uncertain economic times like these, the threats to investors’ second income can be especially high.
Happily, however, investors can to boost their chances of receiving healthy dividends. Purchasing shares in defensive sectors (like utilities, consumer staples, and defence) can be an effective tactic.
So can choosing stocks whose predicted dividends are well covered by expected earnings. Selecting companies with robust balance sheets is also often essential.
REIT benefits
With this in mind, I think Target Healthcare REIT (LSE:THRL) is worth a serious look today. For the next two financial years — to June 2025 and 2026 — the company carries enormous dividend yields of 6.4% and 6.6%, respectively.
To put that in context, the average forward dividend yield for FTSE 100 shares is way back at 3.6%.
Real estate investment trusts (REITs) like Target Healthcare are popular destinations for dividend hunters. In return for corporation tax breaks, they must distribute at least 90% of annual rental income in the form of dividends.
This doesn’t necessarily make them no-brainer investments, however. Their overall profits can slump when interest rates rise and net asset values (NAVs) come under pressure.
Yet despite this threat to Target Healthcare (and its share price), I think that overall it’s a great stock to consider right now for dividend income. It’s why I hold the business in my own Stocks and Shares ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Strength in depth
As its name implies, the FTSE 250 business operates in the highly defensive medical care market. More specifically, it operates 92 care homes across the UK, a sector in which rental growth and collection remains robust across the economic cycle.
Despite tough times for Britain’s economy, rent collection here was still a robust 99% in the 12 months to June, while like-for-like rental growth was a healthy 3.7%.
On top of operating in a stable sector, Target Healthcare has one of the strongest balance sheets in the REIT sector. So even if earnings disappoint, it has the financial headroom to pay a large (and growing) dividend.
As of December, its loan-to-value (LTV) was just 22.7%. LTV measures the amount of debt a real estate company has relative to the market value of its assets.
The cost of servicing its borrowings should remain low over the medium term too. Its weighted average cost of debt (WACD) was 3.95%, and its weighted average debt term 4.7 years, as of the end of 2024.
A long-term buy?
While I consider it an attractive lifeboat in these uncertain times, I believe Target Healthcare also has considerable long-term investment potential.
Britain’s rapidly ageing population and rising healthcare needs are driving substantial growth in the care home sector. This looks set to continue, with the Office for National Statistics (ONS) predicting a 74% rise in the number of people aged 65 and over between 2022 and 2072, to 22.1m.
Given this opportunity, I think Target Healthcare is a great share to consider for a long-term second income.
