When analysing a dividend stock as a potential investment, it’s always worthwhile to inspect its track record. After all, maintaining dividends is hard. And continuously hiking them for decades is even harder.
So when looking at Primary Health Properties (LSE:PHP) and its more than 25 years of hiking payouts alongside a 7.9% dividend yield, it’s difficult not to get excited.
The primary care landlord owns and leases a diverse portfolio of freehold and long-term leasehold properties used by the healthcare sector. Even during recessions, demand for medical support remains strong.
As such, this business generates a highly predictable and reliable income stream, supporting its ever-rising quarterly dividend. And while higher interest rates have dragged down the share price due to property devaluation in recent years, more than half of this decline has been offset by dividends, which have continued to flow.
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So with the damage to the share price now done, and the yield at a juicy near-8%, is now the right time to consider buying?
A dividend gold mine?
One of Primary Health’s biggest customers is the UK government. The majority of its rental income stems from leases to agencies including the NHS. And even with budget cuts, occupancy has remained historically quite resilient, with cash collection occurring on time through various economic cycles.
Each year, a few rental contracts come up for renewal. That can introduce risk if a tenant decides to move out. But it also serves as an opportunity to raise rates and boost cash flow. And across the first half of 2025, this materialised as a 3.1% bump to net rental income while occupancy remained exceptionally strong at 99.1%.
Yet another similar dividend hike followed, bringing the total payout during the six-month period to £47.4m versus a net rental income of £79.3m. And when taking out the £24.2m in debt servicing costs, the group’s dividend coverage stands at roughly 1.2, giving management some small but meaningful wiggle room in case cash flow suddenly gets disrupted.
So far, this all sounds rather promising. So why aren’t more investors jumping in to take advantage of the high yield?
Risk versus reward
Beyond the weak investor sentiment surrounding the real estate sector in general, there are some notable risks attached to this business. The group’s leverage, while manageable, has pushed the loan-to-value ratio to 48.6% which is inching closer to management’s 50% limit.
Interest rate cuts will undoubtedly help to ease the pressure here. But if inflation continues to be stubborn, those cuts may take longer than expected to materialise and could even reverse.
At the same time, there’s significant execution risk surrounding the group’s recent takeover of Assura. The move helped make Primary Health the biggest healthcare landlord in the UK. But integrating such a large portfolio of new locations is no easy task. And if the deal fails to meet performance expectations, the pressure on dividends could rise even further.
The bottom line
Despite its solid track record, investors are being understandable cautious. However, all things considered, Primary Health shares look like they could offer some lucrative passive income for investors comfortable with a bit more risk. That’s why I’m taking a closer look at this dividend stock. But it’s not the only opportunity I’ve got my eye on right now.
