Is this under-the-radar 8% dividend stock a buy now?

This 8% dividend stock benefits from demographic tailwinds and is trading at a discount to book value. Should I add it to my portfolio?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m looking to build massive passive income in my portfolio by loading up on dividend stocks. But with the global economy teetering on the edge of recession, I want to be sure I choose sturdy shares that can weather any impending economic storms.

In particular, I like real estate investment trusts (REITS) right now because interest-rate rises have beaten down their prices badly. While investors are busy piling into so-called ‘value’ stocks, bidding up their price in the process, I hope to find some unloved REITs in the bargain bin. 

Final destination

The REIT sector includes options as diverse as shopping centres, warehousing, and apartment blocks. I’m anxious to avoid any ‘cyclical’ businesses. That’s because I want to protect myself from accidentally getting on a rollercoaster just as it comes screaming down the tracks.

As grey and unexciting as it sounds, I’m interested in one particular REIT that specialises in care homes: Target Healthcare (LSE:THRL).

As well as offering a fat 8% dividend, Target Healthcare capitalises on a demographic trend. The number of over 85s in the UK is forecast to nearly double to 3.3m over the next 25 years. Sadly, the number of people with dementia is also predicted to rise rapidly, from around 1m currently to 1.6m by 2040.

Target Healthcare is a relatively small fish, with a market cap of £500m. It owns 101 properties across the width and breadth of the UK.

Importantly, its properties are of a high standard, with 96% of rooms having en-suite washing facilities. That is vital for residents’ hygiene, privacy, and dignity. That compares with just 29% of care home rooms in the UK.

In addition, Target Healthcare has 34 different companies renting out its properties, providing a good degree of diversification. Its average lease period spans close to three decades, and annual rental growth is baked into the contracts. That means Target Healthcare has shored up a stable and expanding source of income.

Debt under control

With the old world of cheap credit firmly in the rear-view mirror, I am wary of highly leveraged companies. Fortunately, Target Healthcare has its debt burden under control. The Company’s Net Loan-to-Value is 25% — calculated as total debt less cash held divided by the value of the property portfolio.

As rates increase, so might Target Healthcare’s repayments. That would squeeze earnings per share, possibly leading to dividend cuts. The company currently pays out 82% of its earnings as dividends. Compression of its bottom line could quickly eat into shareholder payouts. However, this is not too much of a concern, as the company has a healthy cash cushion of £34m. 

Cut-throat price

Target Healthcare’s share price is historically low, trading at 86p today compared with 110p one year ago and 105p at issuance all the way back in 2013.

That leaves the company looking significantly undervalued, with a price-to-book ratio of 0.72.

There’s a lot to like about Target Healthcare. The business benefits from demographic tailwinds, and it is trading at a big discount despite its generous dividend.

I will consider adding shares to my portfolio when I next have some spare cash to deploy. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Tovey has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »