Something To Consider Before Buying NorthWest Healthcare Properties Real Estate Investment Trust (TSE:NWH.UN) For The 6.7% Dividend

Dividend paying stocks like NorthWest Healthcare Properties Real Estate Investment Trust (TSE:NWH.UN) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a four-year payment history and a 6.7% yield, many investors probably find NorthWest Healthcare Properties Real Estate Investment Trust intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding NorthWest Healthcare Properties Real Estate Investment Trust for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 87% of NorthWest Healthcare Properties Real Estate Investment Trust's profits were paid out as dividends in the last 12 months. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. NorthWest Healthcare Properties Real Estate Investment Trust paid out 82% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It's positive to see that NorthWest Healthcare Properties Real Estate Investment Trust's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Is NorthWest Healthcare Properties Real Estate Investment Trust's Balance Sheet Risky?

As NorthWest Healthcare Properties Real Estate Investment Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. NorthWest Healthcare Properties Real Estate Investment Trust has net debt of greater than 10x its earnings before interest, tax, depreciation and amortisation (EBITDA), which we think carries substantial risk if earnings aren't sustainable.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 1.81 times its interest expense, NorthWest Healthcare Properties Real Estate Investment Trust's interest cover is starting to look a bit thin. Low interest cover and high debt can create problems right when the investor least needs them. We're generally reluctant to rely on the dividend of companies with these traits.

Remember, you can always get a snapshot of NorthWest Healthcare Properties Real Estate Investment Trust's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that NorthWest Healthcare Properties Real Estate Investment Trust has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. Its most recent annual dividend was CA$0.80 per share, effectively flat on its first payment four years ago.

It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Over the past five years, it looks as though NorthWest Healthcare Properties Real Estate Investment Trust's EPS have declined at around 19% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

We'd also point out that NorthWest Healthcare Properties Real Estate Investment Trust issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

To summarise, shareholders should always check that NorthWest Healthcare Properties Real Estate Investment Trust's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think NorthWest Healthcare Properties Real Estate Investment Trust is paying out an acceptable percentage of its cashflow and profit. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. With this information in mind, we think NorthWest Healthcare Properties Real Estate Investment Trust may not be an ideal dividend stock.

Are management backing themselves to deliver performance? Check their shareholdings in NorthWest Healthcare Properties Real Estate Investment Trust in our latest insider ownership analysis.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.