I could leave my excess cash in savings, but I’d rather invest it in the stock market to earn some extra income. And Primary Health Properties (LSE:PHP) stands out as a good prospect for me right now.
The company is a real estate investment trust (REIT) and the stock comes with a 6.5% dividend yield. That’s significantly more than I could get by leaving my cash in the bank.
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REITs
REITs are companies that own and lease property to tenants. And they distribute 90% of the income they generate to shareholders as dividends.
This means investors like me can buy shares in a REIT (or a collection of REITs) today and then just wait for the dividends to roll in. There’s nothing else to do.
No looking for tenants, no dealing with lawyers or estate agents, and no finding contractors to fix breakages. All of that can be left to the company’s operations team.
During 2023, rising interest rates caused the price of shares in REITs to fall sharply. And despite a rally towards the end of the year, I think there are still some great opportunities available.
Healthcare
Primary Health Properties owns 501 primary care facilities located in the UK (476) and Ireland (25). The portfolio is over 99% occupied and the company collects over 98% of the rent it’s owed.
These are strong metrics, but investors should be wary of the firm’s balance sheet. The amonut of interest the business pays on its borrowings has increased consistently over the last decade.
As long as rent collection also continues to grow – as it has – this isn’t a pressing issue and an interest rate cut should be helpful. But shareholders should wach the balance sheet carefully.
An aging population should mean the need for primary care services isn’t going way. And with the NHS accounting for 89% of the rent the business collects, the risk of defaults seems low.
Investing and reinvesting
As a result, I think that 6.5% dividend is likely to be sustainable going forward. I own the stock and I’d be willing to buy more around the £1.04 mark.
At that level, I could buy 7.692 shares with a spare £8,000. And reinvesting the dividends at the same rate could result in a portfolio paying £269 per month in passive income after 30 years.
Of course, that depends on a few things, one of which is the dividend being paid. This is never certain, but Primary Health Properties does have over 20 years of consecutive dividend increases.
Another is the stock price not going up, which would cause the dividend yield to fall. If I can’t reinvest at the same rate, I’ll have to look elsewhere for opportunities.
A stock I’m (still) buying
The stock had already started moving higher at the end of last year. But there are worse problems in investing than having the price of shares I own going up.
I think Primary Health Properties is a company that can provide me with passive income for years to come. If I had £8,000 in excess savings, I’d be happy to buy it at today’s prices.
