The baby boomers are at an interesting juncture of their lives: Too old to rock ‘n’ roll, too young to die.
This is a colorful way to describe the years of late career and early retirement, but it is nothing to take lightly. The aging of the baby boomers is the single biggest mega-trend facing America — and one you can play in several ways, though my preference is for real estate investment trusts (REITs).
At 80 million strong, the baby boomers’ impact on the economy at each stage of their lives has been accurately compared to a pig passing through a python. Their integration into the workforce was a driving factor in the low-productivity/high-inflation nightmare that was the 1970s. And their “getting haircuts and real jobs” was a major driver of the productivity boom of the 1980s and 1990s.
Today, boomers are scrambling to buy income-producing assets to fund their retirement — a significant contributing factor to the persistent low yields we see across the stock and bond markets.
The retirement and aging of the boomers will create fantastic opportunities, particularly in products and services that cater to seniors. Today, I’m going to cover three solid REITs that are uniquely positioned to profit.
To start, they own the sorts of properties that are going to be most in demand from an aging population. But secondly, with their high and growing dividends, they also stand to benefit from the continued hunt for dividend yield.
REITs to Buy: LTC Properties Inc (LTC)
LTC Dividend Yield: 4.8%
We’ll start with LTC Properties Inc (NYSE:LTC).
Its name and ticker symbol say it all. “LTC” is short for “long-term care,” and that is exactly what the company provides. LTC Properties invests in long-term health care, which includes properties for providers, skilled nursing, assisted living, independent living and memory care. LTC also invests in first-lien mortgages secured by long-term care properties.
Roughly four-fifths of LTC’s portfolio is invested in properties, with the remainder in mortgages. The biggest chunk of LTC’s properties are in skilled nursing, followed by assisted living (37%).
LTC boasts a current dividend yield just south of 5% — very competitive among medical REITs — and also pays out monthly instead of quarterly. And importantly, LTC also raises its dividend constantly — at a 5.5% annual clip over the past five years. Had you bought into LTC five years ago, you’d be enjoying a yield on cost of 7.4%. Not bad!
Can we expect that kind of performance in the decade ahead? Given that 8,000 baby boomers turn 65 years old with every passing day, I would say absolutely.
REITs to Buy: Ventas, Inc. (VTR)
VTR Dividend Yield: 4.7%
Ventas, Inc. (NYSE:VTR) is a king among REITs. It’s one of the bluest of the blue-chip REITs, and it’s one of the few REITs among the ranks of the S&P 500.
Even if you don’t hold Ventas directly, you might be familiar with it regardless. That’s because its $23 billion market cap typically makes it one of the top holdings in most REIT funds.
Due to its sheer size, VTR probably can’t grow at the rate that some of its smaller rivals can, but the positive But with its size comes stability and financial strength. And Ventas is certainly no slouch when it comes to growth, I might add. Its stock has generated total returns of about 29% per year over the past 15 years.
A little more than half of Ventas’ portfolio (by contribution to net operating income) goes to senior housing, split among “triple net” properties, domestic operating properties and international operating properties. The rest of the portfolio is invested in skilled nursing/post-acute care facilities, medical office buildings and hospitals, as well as other properties and even loans.
So, in Ventas, you get a nice, diversified sampling of the facilities that aging baby boomers will be using in the decades ahead.
VTR shares have taken a shellacking in 2015, but that (and a dividend hike) have sent its yield rocketing up close to 5%. Like LTC, Ventas is a serial dividend raiser — the REIT has grown its dividend at an 8% clip over the past five and 10 years.
It might be hard to sustain that kind of growth over the next 10 years, but if anyone can do it, it would be Ventas.
REITs to Buy: Health Care REIT, Inc. (HCN)
HCN Dividend Yield: 4.7%
Health Care REIT, Inc. (NYSE:HCN) is another solid baby boomers play that’s big (its market cap is $28 billion) and belongs to the S&P 500.
While the name Health Care REIT might have you believe that HCN deals heavily in hospitals and doctor’s office, that’s not quite the case. In fact, only about 36% of the property portfolio by value is invested in health-related properties.
Instead, about 64% of the portfolio is in senior housing, split between properties that HCN operates (38%) and those that are leased on a triple-net basis (26%). On the health side, about 30% of HCN’s portfolio includes medical office buildings and skilled nursing facilities, and the rest is split between hospitals and research facilities.
Another perk of owning HCN? Apart from the skilled nursing facilities and hospitals, which depend heavily on Medicare and Medicaid, HCN’s tenants have very little dependence on the government. Across its portfolio, 87% of its revenues are from private pay clients. That’s a major positive in an era of slashed reimbursements and Obamacare restrictions.
HCN’s dividend yield is right up there with the other two REITs, though its dividend growth — at 3.6% over the past five years — is the slowest of the bunch. Still, had you bought HCN five years ago, you’d be enjoying a yield on cost of about 7%.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long LTC and VTR. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.