This "Boring" Income Play Could Get You 76%, Even in This Market

William Patalon III

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In journalism circles, there's an axiom that tells writers that it's usually better to "show" than to "tell."

It's a nifty bit of wisdom that I've shared with dozens of young writers through the years.

In this Private Briefing report, I'm taking my own advice.

Yesterday, we told you that that high-yielding dividend stocks were one of the best ways to navigate this whipsaw market.

Today we're going to show you just how powerful one particular dividend play can be.

"Look at solid companies, with strong dividend yields"

Capital Wave Forecast Editor Shah Gilani told us that solid companies with strong cash flows and consistent dividend payouts head his "Buy" list right now.

"If someone came to me and asked me what to start buying right now, I'd tell them to look at solid companies with strong dividend yields – especially those that you know are going to continue paying those dividends," Shah told me. "It doesn't end there, though. You only want to buy stocks that you'd be willing to add to – to buy more of – if prices were to fall. That's how you have to look at this market: If you're going to buy, you want to buy at lower and lower prices. You actually hope it goes lower so that you can buy more. And because of the strong dividend angle, as these stocks fall in price, the yield goes higher."

There's one stock in particular that hits all these goals.

And you know it well.

I'm talking about Omega Healthcare Investors Inc. (NYSE: OHI), a healthcare-focused real-estate investment trust (REIT) with a 5.5% yield and a history of quarterly dividend increases.

We first told you about you about Omega back in September 2012, and the stock has surged 59.8% since then. If you add in the $3.80 a share in dividends that was available along the way, the total return spikes to 76.2%.

If you're new to Private Briefing – or didn't buy the stock any of the times we've recommended it – don't feel that you missed the ride. Thanks to the underlying dividend story, this is one of those rare stocks for which there's almost no "wrong" time to snap up shares.

Let me tell first tell you a bit about the company. And then we'll run some numbers together.

By the time we're finished, I'm betting this will be one of those rare "math lessons" you'll look back on with a smile.

Or maybe even a greedy grin.

We Know This Firm Inside and Out

With its corporate headquarters in Hunt Valley, Md., Omega is actually based not far from the Money Map Press offices here in downtown Baltimore. Thanks to that proximity, several of us here have followed the company for several years and know its business model well.

The REIT invests in income-producing healthcare facilities in the U.S. market – with a special focus on long-term care operations. In other words, OHI provides leases or mortgage financing to operators of skilled nursing facilities (SNFs), assisted living facilities (ALFs), independent living facilities and rehabilitation and acute care facilities.

The target market for Omega is a great one – America's senior citizens, a group that's ballooning in number. The last time I checked, the number of Americans aged 85 and older was projected to zoom from about 2% of the nation's population in 2010 to roughly 5% in 2050. In real numbers, that means Omega's base of possible customers is soaring from about 6 million to a projected 21 million.

At the 2014 midpoint, Omega Healthcare owned or held mortgages on 563 skilled nursing facilities, assisted living facilities and other specialty hospitals with approximately 63,733 licensed beds (61,353 available beds) located in 37 states and operated by 49 third-party healthcare operating companies.

OHI does not primarily invest in mortgages. It instead chooses to buy the real estate and leases it on a long-term basis to the healthcare operator – who then takes the operating risk, including the sometimes tricky Medicare reimbursements.

This approach generates a lower up-front yield than mortgage investment. However, the leases are written with an "escalator" clause for inflation, and Omega Healthcare remains the owner of the property itself, which means the yield on OHI's investments tends to rise with inflation.

It's this shrewd strategy that allows Omega to maintain such an aggressive payout policy.

As a REIT, Omega Healthcare is able to pay out a high percentage of its cash flow as dividends. And it boosts those payouts at a consistent, predictable rate. The result: one of the most powerful dividend stories you'll find anywhere.

And the numbers we're about to work through with you will prove it.

William Patalon III

About the Author

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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