3 Health Care REITs With 4%+ Dividend Yields by Sure Dividend
The benefit of investing in REITs (Real Estate Investment Trusts) is they are required by law to pay out 90% or more of their income in the form of distributions (basically, dividends).
As many investors who survived through the Great Recession of 2007 to 2009 can attest, the real estate market can be very unstable.
The health care industry, on the other hand, is much more stable. That’s because governments, institutions, and individuals cannot cut back on health care spending no matter how good or bad the overall economy is. In many cases, it is quite literally a matter of life and death. Maybe that’s why about 3 in 5 personal bankruptcies are due to medical bills.
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There are a select group of stocks that are both required to pay out 90% of their income as distributions and operate in the stable health care industry.
I’m talking about Health Care REITs – businesses that make their money through investing in health care related real estate: hospitals, long-term care facilities, medical office buildings, etc.
This article examines the only 3 large-cap United States based health care REITs with dividend yields greater than 4%. Click here to see 12 other high dividend stocks.
Health Care REIT #1: Ventas, Inc.
Ventas (VTR) is the 2nd largest of the 3 companies examined in this article based on its market cap of $18.8 billion. Ventas has paid steady or increasing dividends each year since 2000. Ventas was created in 1998 when it was spun-off from Vencor – which was renamed Kindred Healthcare (KND).
The company has changed significantly in 2015 through the acquisition of Ardent Health Services and the spin-off of its own post-acute care facilities into Care Capital Properties (CCP). Ardent Health Services owns 14 hospitals and 3 multi-specialty physician groups in Amarillo, Texas; Tulsa, Oklahoma; and Albuquerque, New Mexico. The Care Capital Properties spin-off was significant as well – the spin-off currently has a market cap of $2.3 billion.
After the recent acquisition and spin-off, Ventas owns 1,294 facilities. The image below shows Ventas’ locations geographically:
The company’s management is adept at capital allocation. Over the last decade, Ventas has managed to compound funds-from-operations-per-share (referred to hereafter as FFO-per-share) at 8.8% a year.
What’s more, the company currently has a 5.2% dividend yield. Ventas may not be able to manage the rapid FFO-per-share growth it has accomplished over the last decade. Still, the company should continue growing somewhere between 5% and 9% a year. Between growth and dividends, investors in Ventas should expect total returns of between 10% and 14% a year.
Ventas is currently trading around dividend yield highs not seen since the Great Recession of 2007 to 2009. The company appears to be a timely investment for investors looking for current income as well as income growth.
Health Care REIT #2: Health Care REIT, Inc.
Health Care REIT (HCN) is the largest REIT in the United States health care industry. The company currently has a market cap of $23.8 billion. The trust was founded in 1970 and has paid steady or increasing dividends every year since 1992 for a streak of 23 consecutive years without a dividend reduction.
Health Care REIT owns 1,411 properties in the US, UK, and Canada. The REIT has an informative interactive map which provides a fine level of detail of the company’s holdings.
Long-term investors in Health Care REIT have seen excellent total returns. The image below from the company’s 2014 annual report shows Health Care REITs total returns through 12/31/14:
Despite these attractive historical total returns, investors should not expect such solid gains going forward. Over the last decade, Health Care REIT has managed to compound its FFO-per-share at just 3.5% a year.
Going forward, I expect Health Care REIT to compound its FFO-per-share at somewhere between 3% and 5% a year. The company will realize this growth from increased property acquisitions and the aging populations in the United States, United Kingdom, and Canada.
Health Care REIT’s expected growth rate of between 3% and 5% a year combined with its current dividend yield of 4.9% gives investors an expected total return of around 8% to 10% a year. While this is certainly good, it is very unlikely that Health Care REIT matches its historical total returns rates.
The company is currently trading at a price-to-FFO ratio of 16.4. Over the last decade, Health Care REIT could be purchased for dividend yields of between 4.7% and 7.1%. The company is actually trading near valuation highs using its dividend yield. As a result, I believe the company to be somewhat overvalued at this time. Patient investors should wait to initiate a position in this business until its dividend yield is at 6% or higher.
Health Care REIT #3: HCP, Inc.
HCP, Inc. owns and operates around 1,200 health care properties in the US and British Isles. The company currently has a market cap of $17.7 billion, making it the smallest of the 3 health care REITs in this article.
Unlike the other two health care REITs analyzed in this article, HCP is a Dividend Aristocrat. Click here to see all 52 Dividend Aristocrats. The company was founded in 1985 and has increased its dividends every single year, without exception. The image below from the company’s most recent investor presentation shows HCP’s dividend history:
HCP is best known for its senior housing and post acute/skilled care facilities. Together, these two types of facilities account for about two-thirds of HCP, Inc’s income.
Over the last decade, FFO-per-share have grown at 5.8% a year for HCP. The company has benefited from the dual trends of aging populations in both the United States and United Kingdom, as well as greater health care expenditures as a percentage of GDP in these two countries. These two trends will very likely continue to drive growth for HCP. Going forward, I expect the company to compound FFO-per-share at between 3% and 6 % a year.
HCP has the highest dividend yield of the 3 REITs in this article. The company currently offers investors a dividend yield of 5.9%. This yield combined with the company’s expected growth rate of 3% to 6% a year gives investors an expected total return of about 9% to 12% a year.
HCP appears to be trading around fair value at current prices considering its current dividend yield of 5.9%. HCP, Inc’s dividend yield has fluctuated between 4.5% and 7.5% over the last decade.