Two stocks I’d be willing to buy when I next can, to help me build my passive income stream, are OSB Group (LSE: OSB) and Target Healthcare REIT (LSE: THRL).
Here’s why!
Introductions
OSB Group is a specialist lending and retail savings business. Its primary offering is mortgages and loans for small businesses in the buy-to-rent sector.
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Target Healthcare is set up as a real estate investment trust (REIT). This simply means it’s a property business with certain perks – such as no corporation tax obligations – and in return it must return 90% of profits to shareholders. Unfortunately, there are no points for guessing the type of properties that the firm specialises in, as the name pretty much gives it away.
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Why I’d buy OSB shares
OSB Group shares offer a juicy dividend yield of just over 7%. Plus, the dividend currently looks well covered by earnings. Furthermore, the firm has increased the dividend for the past nine years in a row. It did suspend payouts during Covid, but I won’t hold that against it or mark it down. However, I understand that dividends aren’t guaranteed, and past performance is never an indicator of the future.
Next, the shares look excellent value for money, as they trade on a price-to-earnings ratio of just over six.
From a market view, the private rental sector in the UK has experienced huge growth in recent years. It looks to me like OSB’s growth has coincided with this. Due to the current housing imbalance in the UK, this momentum could continue, and help OSB deliver stellar returns.
However, two issues concern me. Firstly, the business has a low tolerance for bad loans. This simply means if debtors begin to default, there could be trouble on the horizon. I reckon this is a real possibility based on the current economic climate. The other issue is current high debt levels on its balance sheet. There may come a time when paying down debt could take precedence over rewarding investors.
Why I’d buy Target Healthcare shares
The healthcare area that Target makes money from is care homes. This looks like a potential money spinner to me, due to the ageing population in the UK. Demand for care homes should remain robust. In turn, growth and increased returns from Target shares could be on the cards, in my view.
At present, the shares offer a dividend yield of 7.2%. For context, the FTSE 100 average yield is closer to 4%.
Despite what looks like a sound business model, and an enticing rewards policy, there are risks I’m worried about.
Firstly, higher interest rates at present make debt costlier to pay down, and could stunt growth aspirations. REITs often borrow to fund growth, and this borrowing will cost more at present.
Plus, existing debt may be harder to pay down. Last week, the business announced the sale of four care homes in a deal worth £44.5m to help pay down debt. Although the sale only represents 4% of its assets, it’s still a sign of the difficult financial and economic picture at present.
