The aging U.S. population is one of the most powerful social trends in the country. Retirees searching for income are one of the most powerful financial forces in the market. When you add the two together, you have the perfect cocktail of growth and income.
With the U.S. Federal Reserve punishing retirees by smashing interest rates into the ground, yield-hungry investors continue to turn away from traditional income safe havens like Treasury and investment-grade corporate bonds. One of the places they are turning to is real estate investment trusts (REITs). The key feature of a REIT is that its corporate structure requires it to pay 90% of its income to its limited partners, or unit holders.
This corporate structure has produced some very high yields during this time of record-low interest rates.
At the end of 2012, the average dividend yield on a REIT was about 3.6%, almost twice the yield of the benchmark 10-Year Treasury note, which yields a mere 2%. And after years of falling yields on REITs, the trend has begun reversing, with the groups average dividend yield up almost 12% in 2012. Looking forward, dividend yields on REITs are projected to grow about 6.5% annually through 2016, according to investment research company Cohen and Steers. This is why Carla Pasternak, chief strategist of High-Yield Investing, is calling the real estate recovery "one of the most dramatic turnarounds in U.S. history."
But not all REITs are created equally. In spite of their general emphasis on real estate, there are many different subcategories of REITs. My favorite REITs are ones that focus on assisted-living facilities for senior citizens. These REITs provide incredible leverage to the aging domestic population.
Between 2006 and 2011, revenue from senior long-term care facilities increased 31% to $259 billion, according to a 2012 report from health care market research firm Kalorama Information. And once again, this trend is in position to accelerate, with industry revenue forecast at $353 billion by 2016, another bullish growth projection of 37% in just three years.
As you can see, not only are dividend yields of REITs projected to grow steadily in the next three years, but demand for assisted-living resources for an aging domestic population is also expected to surge.
Savvy investors who jump in on this trend have the perfect recipe for growth and income.
Here is a list of six high-yield, assisted-living health care REITS.
Omega Healthcare Investors
Omega Healthcare emphasizes on long-term health care facilities in the United States. With a market cap of just $3.1 billion, this is a relatively small player in the health care REIT space. Shares have been on a tear in the past year, up a market-beating 40% to return within 10% of its all-time high above $30 from early 1998. These gains have been driven by sharp upward movement in estimates. The 2013 consensus earnings estimate, for example, are up 8.5% to $2.44 a share in just the last 30 days, a bullish 12% year-over-year growth projection.
That has shares trading with a price-to-earnings/growth (PEG) ratio of just 2.1, a slight discount to the peer-group average of 2.7. And with an outsized dividend yield of 6.5%, this health care REIT offers a compelling combination of growth, income and value. Take a look at the big gains below.
Senior Housing Properties
Senior Housing Properties is another health care REIT with an emphasis in senior housing properties in the United States. This isn't a huge company either, with a market cap of just $4.7 billion dwarfed by the mega-giants in the health care industry. Since going public in early 2000, shares are up an incredible 194%, easily beating the S&P 500's meager return of less than 2% in the same time. Even though shares are up 13% in just the past six months, the valuation still looks attractive, with a PEG ratio of 2.8, in line with its peer group. With an outsized dividend yield of 6.1%, which is three times the benchmark 10-Year Treasury note, this health care REIT is another force of income and value.
Risks to Consider: Fiscal deficits threaten long-term spending in Medicare and Medicaid, which currently represent meaningful portions of total spending in the health care industry in general and assisted-living programs.
Action to Take --> These six REITS offer the ultimate combination of growth and income, providing leverage against the aging domestic population while carrying outsized yields. Out of the group, I particularly like Omega Healthcare Investors and Senior Housing Properties because of their huge yields and attractive valuations.