If you're ababy boomer , then supplementing your
retirementearnings with risingdividend income is likely at the
top of your wish list.
A great way to accomplish this is by owningstocks that pay
above-average dividends for their sector. With the exception of a
few brief periods, above-average yielders have consistently
outperformed the S&P 500 since 1990, returning on average 10%
annually, versus 8.6% annual returns for thebenchmark index . It
may not sound like much, but an extra 1.4% a year can make a big
difference in the current low interest rate environment where
10-Year Treasurybonds yield less than 2%.
Of course, an above-average yield doesn't necessarilymean we
have a high-qualitystock , so it's important to choose carefully.
My colleague Carla Pasternak, director of income research of
, uses these guidelines to select what she calls the best "
Retirement Savings Stocks
1. Long track record of paying consistent and rising
2. Matching history of improving earnings.
3. Strongcash flow sufficient to pay dividends and then some.
4. High projected growth that can lead to dividend increases.
5. Zero or little debt, because debt-free companies have morecash
6. Noncyclical business models that canprofit in all markets any
A reliable incomeinvestment that meets all of the above
Senior Housing Properties Trust (
Senior Housing is the nation's fourth-largest health carereal
estate investment trust (REIT) . The company owns $5.3 billion of
assets, consisting mainly of senior living properties and medical
office buildings. Senior Housing derives most of its rent from
triple-net leases, which require the tenant to pay the
property'soperating expenses and insurance, making it less risky
for the REIT.
Among the health care REITs, Senior Housing has the highest
percentage of private-pay renters at 94% of the portfolio. That's
by design. The REIT doesn't purchase nursing homes or other
facilities that depend on Medicare/Medicaid income and has been
steadily divesting these for a decade. A portfolio of private
payers helps Senior Housing lock in higher profits and minimize
exposure to looming cuts in government spending.
What I find most appealing about this REIT is its growing
portfolio of medical office buildings, most of which are located
on hospital campuses.
Occupancy rates are 93% for the medical office building
portfolio. These propertieswill benefit not only from agingbaby
boomers using more health care services than younger Americans,
but also from a growing trend favoring outpatient medical
procedures. Not long ago, even simple surgeries required a
hospital stay, but that is changing as new minimally invasive
procedures cut the number of hospitalizations.
Physicians often spend their careers in the same location, so
medical office buildings generally enjoy stable occupancy rates
and predictable annual 2-3% rent bumps. At present, medical
office buildings account for roughly one-third of the portfolio,
but Senior Housing wants to increase this percentage to more than
Senior Housing growsfunds from operations (FFO) by investing
in propertiesoffering attractive return oninvestments , while
maintaining a prudentpayout ratio andbalance sheet .
Year-over-yearFFO grew 15% in 2012 to $296 million, andanalysts
expect the REIT to deliver 7% growth in 2014 and 5% annual growth
thereafter. In addition, Senior Housing has a solid balance sheet
with debt at 43% of book capital and no near-term debtmaturities
The company spent $350 million in 2012 on acquisitions and is
expected to earn 8% annual returns on these investments. The REIT
anticipates at least $300 million to $400 million of acquisitions
this year and isn't ruling out a larger transaction.
Senior Housing has raised its dividend each year since 2001
and grown payments 3% each of the past five years. Payout from
FFO is modest by REIT standards in a mid-80% range. The last
dividend increase was 1.3% in October 2012 to a $1.56 annualized
rate yielding 6.1%.
A little-known pure play worth considering
For a pure play in the medical office building space,
Healthcare Trust of America (
is a newcomer well worth considering. This REIT was formed in
2006, but only went public in 2012, so it's still under the radar
for many investors.
Healthcare Trust owns medical office buildings on the campuses
of major hospital groups in 27 states. The REIT acquired most of
its portfolio during therecession at very reasonable prices. The
portfolio has a $2.4 billion value and anoccupancy rate exceeding
The REIT spent $295 million in medical office building
acquisitions last year. These newly acquired properties are 99%
occupied. In addition, the REIT transitioned 4.9 million square
feet of leasing space to in-house management, raising the
internally managed portion of the portfolio to 70%. This move
improves efficiency and reduces costs.
The REIT has an exceptional balance sheet with debt at only
33% ofcapitalization and $503 million available on its $575
million bank line ofcredit . FFO has grown five-fold in the past
five years from $21.6 million to $135.3 million, while FFO per
share rose 17.3% in 2012 to 61 cents. Analysts predict another 7%
growth this year. FFO readily covers the annual dividend of 58
cents per share, which yields close to 5%. Sincegoing public last
year, Healthcare Trustshares have gained 18.6%.
Risks to Consider:
Senior Housing is highly dependent on
Five Star Quality Care (
for 44% of its portfolio income. However, this is down from 72%
of income a few years ago and the percentage continues to
decline. Healthcare Trust is a newly listed REIT, so it lacks a
record of dividend growth.
Action to Take -->
If your goal for your retirement portfolio is safety, stability
and a rising dividend, either of these two REITs are hard to
beat. Senior Housing is the safer choice due to its steadily
rising dividend, but newcomer Healthcare Trust will likely be the
faster grower as it builds from a smallerasset base.
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