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Two stocks I would be willing to buy next time I can, to help me build my passive income stream, are OSB Group (LSE: OSB) and Target Healthcare REIT (LSE: THRL).
This is why!
Introductions
OSB Group is a company specialising in loans and savings for individuals. Its main offering is mortgages and loans for small businesses in the purchase and rental sector.
Target Healthcare is incorporated as a real estate investment trust (REIT). This simply means that it is a real estate company with certain advantages (such as no tax obligations) and in exchange it must return 90% of profits to shareholders. Unfortunately, there is no reason to guess what type of properties the company specializes in, as the name pretty much gives it away.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any type of tax advice.
Why would I buy OSB stock?
OSB Group stock offers a juicy dividend yield of just over 7%. Moreover, the dividend appears to be well covered by earnings. Furthermore, the company has increased the dividend for the past nine consecutive years. It suspended payments during the Covid pandemic, but I won’t hold that against it or downgrade it. However, I understand that dividends are not guaranteed and past performance is never an indicator of the future.
Furthermore, the stock appears to be excellent value for money, trading at a price-to-earnings ratio of just over six.
From a market perspective, the private rental sector in the UK has seen tremendous growth in recent years. It seems to me that OSB's growth has matched this growth. Given the current imbalance in housing in the UK, this momentum could continue and help OSB generate stellar returns.
However, there are two issues that concern me. First, the company has a low tolerance for bad loans. This simply means that if borrowers start defaulting on their obligations, there could be trouble on the horizon. I consider this a real possibility based on the current economic climate. The other issue is the current high levels of debt on its balance sheet. There may come a time when paying off debt may take priority over rewarding investors.
Why would I buy Target Healthcare stock?
The healthcare sector where Target makes money is nursing homes. I think this is a potential revenue stream, given the ageing population in the UK. Demand for nursing homes should remain strong. In turn, I think Target's stock could grow and increase its profitability.
The stock currently offers a dividend yield of 7.2%. For context, FTSE 100 Index The average yield is closer to 4%.
Despite what appears to be a solid business model and an attractive rewards policy, there are risks that concern me.
First, higher interest rates today make it more expensive to service debt and could dampen growth aspirations. REITs often borrow to fund growth, and that borrowing will cost more today.
Existing debt may also be harder to repay. Last week, the company announced the sale of four care homes in a deal worth £44.5m to help pay off debt. Although the sale only represents 4% of its assets, it is still a sign of the current difficult financial and economic situation.
