Why Income Investors Should Buy These 2 Health Care REITs

Real estate investment trusts, or REITs, are very popular with income investors. That’s because REITs receive a favorable tax classification, and in exchange, are required to distribute the vast majority of their cash flow to investors as a dividend.
Two REITs in particular that are very attractive are HCP Inc. (NYSE: HCP) and Health Care REIT Inc. (NYSE: HCN). The reason why these two REITs are such compelling investment opportunities is not just their high dividend yields, but also the fact that they both operate in a highly lucrative industry that has a great deal of long-term growth ahead of it.
HCP and Health Care REIT are great picks because they operate a number of health care-related properties. They’re both involved in acquiring and leasing properties, including senior housing, medical facilities and hospitals.
HCP and Health Care REIT are set to capitalize on a massive demographic shift in the United States. In a survey published earlier this year, Gallup reported that Baby Boomers – people born roughly between 1946-1964 – are the single largest generation in the U.S. Baby Boomers alone constitute about one-third of the U.S. adult population. There are millions of people entering retirement every year, and as the general population ages, it will result in enormous demand for health care.
The aging population should provide the health care industry a strong long-term tailwind, which is why I expect both HCP and Health Care REIT to have steady growth for many years. According to the U.S. Census Bureau, between 2012 and 2050 the 65-and-older population will double to more than 83 million. This means demand for laboratory services, hospitals and nursing homes will rise significantly over time.
Both HCP and Health Care REIT have high-quality portfolios that should profit from this major trend. HCP derives 36% of its portfolio from senior housing, 28% from skilled nursing facilities, 17% from life science buildings and 16% from medical office buildings.
For its part, Health Care REIT holds more than 1,200 properties spread across the United States, Canada and the United Kingdom. Eighty-seven percent of Health Care REIT’s revenue is derived from private-pay sources.
The business model for health care REITs is to raise capital, invest in health care properties, and then collect rents which allow them to invest in additional properties. This creates something of a “snowball effect” that produces steady growth like clockwork.
Indeed, last year HCP and Health Care REIT grew funds from operations – a non-GAAP equivalent to traditional earnings per share – by 2% and 8%, respectively. HCP expects 5% growth this year, while Health Care REIT anticipates 3%-5% growth in funds from operations in 2015.
Another year of steady growth this year will allow both companies to continue increasing their dividends. In fact, HCP is the only REIT included in the prestigious S&P 500 Dividend Aristocrats index, which comprises companies that have raised dividend payouts for at least 25 consecutive years.
HCP yields 5.7% currently. Health Care REIT already announced a 4% dividend raise earlier this year, and yields 4.6% right now.
The stock prices of HCP and Health Care REIT haven’t grown much over the past few months, because investors are likely worried about rising interest rates. But long term, these companies will be just fine. Interest rates are still near historic lows, and even when the Federal Reserve does increase rates, it will likely do so gradually to avoid shocking the financial system.
HCP and Health Care REIT have been around for decades, during periods of extremely high interest rates. Still, they have remained profitable and have rewarded shareholders through thick and thin. Even with the expected rise in interest rates, dividend investors have a great buying opportunity on their hands.

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