Exploring Passive Income - Dividend Paying Investments Return on Equity

On 12/30/2020 we have reached the Ex-Dividend Date for my NHI stock investment. That means that if I own it on that day, then I get the past quarter's dividend payout. That payout won't actually happen until January 30th, but even if I sell it today, I'll still get that dividend payout. It has been about six weeks holding this investment, what have I learned along the way?

First of all, if you have read any of my other posts I've learned that life is unpredictable at best. I'll let those posts speak for themselves, you're here to learn about dividend paying stocks. First and foremost, never trade after hours. When I ordered the purchase of my stock, the closing price was $66.35 per share, but it was after hours and the market was closed. I'm new to this and didn't think much of it, figured price might slide a little this way or that but probably not a huge shift. Turns out, when the deal was settled, I wound up paying $68.30 per share or about $2 more than expected. I would call that a significant change by the time the market reopened. If I trade while the market is open, I assume it will happen faster and the price would have shifted less. Do I know that for sure....no.

Price change while the market was closed was a little shocking, but I'm in this for the dividends, so as long as the value doesn't drop out totally these shifts in the stock price really don't mean much to me. The dividend will still pay out at the expected $4.41 per year. This is the primary reason I decided to go this route, because I'm not chasing that stock value day to day or the stress that comes with it. Now that we are about six weeks into this, the stock value on this Ex-Dividend date hit a high of $70.49, making money on the stock valuation and the dividend, perfect! I do expect the value of the stock to drop by about the same as the payout, that value comes directly off the stock price. We collect the check next month and are currently still a bit ahead on the stock value. Not bad....

I've been trying to learn more about investments so I can make better decisions in the future. What to look at first...how about profitability over the last 12 months, or the shareholders return on equity(ROE). Why ROE? Well, it is useful for assessing how effectively a company can generate a profit for its shareholders equity. Remember, I'm new to this also, so if you see mistakes in my calculations below I'd love to hear about it so I can learn also. 

Given:

Using the information found at National Health Investors Financial Statements in column "2020 Q3 YTD (as of 9/30/2020)", we find the following information available to us as investors.

On the Cash Flow Statement tab, I find the net income on the line labeled "Net Income" and see it has a value of $148,148. That value is in US dollars (in thousands). This number doesn't represent the total income for the year. We need to apply an expected income for the last quarter of 2020 to get year end calculations. We will calculate a reasonable estimate here:

Expected Net Income = Net Income YTD (3rd Q3) + (Net Income YTD (3rd Q3) / 3)

Expected Net Income = $148,148 million + ($148,148 million / 3)

Expected Net Income = $198 million Dollars

On the Balance Sheet tab, I find the line labeled "Total National Health Investors, Inc. Stockholders' Equity" and see it has a value of $1,493,049. That value is in US dollars (in thousands). This represents the total equity given to the company by it's shareholders. A company uses this equity to operate and generate the income or profits. Unless there is a stock split or something similar, this number shouldn't change before the end of the year.

Average Shareholder Equity = $1.493 billion dollars

Find:

Return on Investment (ROE) = Expected Net Income / Average Shareholder Equity

Solution:

ROE = $198 million / $1.493 billion Dollars

Answer:

ROE = 13%

Is 13% a good return on investment? The best way I see to evaluate that question is to compare to similar REIT investments. Is this a perfect comparison? No, because REITs vary wildly even within their own classifications, but it is the best evaluation we can make. Based on information found at this link on 12/30/2020, Yahoo!Finance , we find the industry average is 5.4%. That's clearly superior when compared to industry averages, but does it tell the whole story? No, we will need to consider debt, which we will do in the next article on this subject...