NEW YORK (TheStreet) -- Wouldn't it be nice if your investments were required by law to pay you?
Real estate investment trusts are legally obligated to pay out 90% or more of their income in the form of annual distributions to shareholders. As long as these businesses are profitable, they will be paying their shareholders the majority of their profits.
That's a great position to be in as an investor. There's a catch though.
The real estate market is notoriously unstable. It is characterized by using large amounts of leverage relative to other industries. This works great when real estate prices rise ... but not so great when the economy is struggling and tenants can no longer pay their mortgages.
If the Great Recession of 2007 to 2009 taught us anything, it's that real estate prices can and will fall from time-to-time. (Click here to see 10 recession resistant dividend stocks.)
Contrast the real estate industry to the health care industry. Governments and individuals simply cannot cut back (much) on health care spending -- even when money is tight. In many cases, it is quite literally a matter of life or death.
That's why the health care industry is one of the most recession-resistant industries in which to invest.
There are a select group of REITs that lease their properties to health care companies. All three of the health care REITs in this article have at least 4% dividend yields (one has a dividend yield of nearly 6%). All of them have paid steady or increasing dividends for at least 10 years.
This article examines the only three large-cap U.S.-based health care REITs with dividend yields greater than 4%.
Ventas (VTR - Get Report) has a market cap of $18.8 billion, making it the second-largest of the three REITs analyzed in this article. Ventas was created in 1998 when it was spun-off from Vencor, now called Kindred Healthcare (KND) .
The company has a solid dividend track record, having paid steady or increasing dividends each year since 2000.
Ventas has undergone two large transactions this year that have reshaped the company:
- The acquisition of Ardent Health Services
- The spin-off of its own post-acute care facilities into Care Capital Properties (CCP) .
Ardent Health Services owns 14 hospitals and three multi-specialty physician groups in Amarillo, Texas; Tulsa, Okla.; and Albuquerque, N.M.
The Care Capital Properties spin-off currently has a market cap of $2.3 billion.
After the recent acquisition and spin-off, Ventas now owns a total of 1,294 health care facilities spread across the United States and Canada.
Ventas' management has allocated capital efficiently over the last decade, compounding funds-from-operations-per-share (referred to hereafter as FFO-per-share) at 8.8% a year.
The company currently offers investors a well-above-average 5.2% dividend yield. Over the next several years, I expect Ventas to compound its FFO-per-share at between 5% and 9% a year. This growth, combined with its dividend yield, gives investors expected total returns of between 10% and 14% a year.
Ventas appears undervalued at current prices. The company is trading near dividend highs not seen since the Great Recession. Simply put, now is the best time in the last six years to start a position in Ventas.
2. Health Care REIT
Health Care REIT (HCN) is the industry leader in the United States health care REIT industry, based on its market cap of $23.8 billion.
The company has paid steady or increasing dividends for 23 consecutive years. Health Care REIT was founded in 1970 and currently owns 1,411 properties in the U.S., U.K. and Canada.
Over the last 20 years, Health Care REIT has compounded investor wealth at an average 15.3% a year -- a truly amazing streak of excellent performance.
Investors should not expect 15%+ total returns going forward, however. Case-in-point: The company has managed to compound its FFO-per-share at just 3.5% a year over the last decade.
Over the next few years, Health Care REIT should compound its FFO-per-share in a range of between 3% and 5% a year. The company will realize this growth thanks to increased property acquisitions and the aging of 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. (Click here to see 12 other high dividend stocks.)
Over the last decade, Health Care REIT has traded in an average dividend yield range of between 4.7% and 7.1%. With a current dividend yield of 4.9%, Health Care REIT is trading near the high end of its historical valuation. Despite its excellent track record, now is not the time to enter into a position in Health Care REIT.
HCP (HCP - Get Report) currently has a market cap of $17.7 billion. The company owns and operates approximately 1,200 health care properties in the U.S. and British Isles. Founded in 1985, HCP generates two-thirds of its profits from its senior housing and post acute/skilled care facilities.
HCP is unique among health care REITs in that HCP is a Dividend Aristocrat. HCP has increased its dividend payments every single year since 1985. (Click here to see all 52 Dividend Aristocrats.)
The company has managed to increase FFO-per-share at 5.8% a year over the last decade. The company benefited from -- and will continue to benefit from -- two macro-economic trends in the United States and United Kingdom:
- Aging populations/baby boomers
- Greater health care expenditures per capita.
Going forward, I expect HCP to compound FFO-per-share at between 3% and 6 % a year, in line with historical growth.
While this level of growth is nothing to write home about, HCP does have another way of rewarding shareholders: through large dividend payments. The company currently has a dividend yield of 5.9%. This yield combined with expected growth of 3% to 6% a year gives investors expected total returns of around 9% to 12% a year.
Additionally, the company appears to be trading around fair value based on its dividend yield. Over the last decade, HCP stock has offered investors an average dividend yield of between 4.5% and 7.5% a year. With a dividend yield just below 6%, the company is trading right around its average historical dividend yield.