3 REITs to Weather Any Fed Action

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015

Last Thursday, Janet Yellen told investors the same thing she always says. They, in turn, took the news as they usually do. They panicked and sold everything.

The S&P 500 finished Friday down 1.6%. The Dow dropped 1.8%. And the Nasdaq fell 1.4% – but Real Estate Investment Trusts (REITs) held up well. As a sector, they finished the day unchanged, while my favorite subset immediately rallied (more on this shortly).

REITs themselves usually pay higher dividends than regular stocks, as they can avoid income taxes if they pay out most of their earnings to their investors. These higher payout ratios have boosted their popularity with investors since interest rates went to zero in 2008.

The Vanguard REIT Index Fund (VNQ) has doubled over the last seven years, but it’s down 13% from its January highs. Why don’t investors want this 4% yield any longer? Because they’re worried that Yellen will raise rates to the point that everyone will look to safer vehicles (like Treasuries) for yield.

As my Contrarian Income Report readers know, the “secret” strategy I follow leads me to believe these concerns are overblown. And that’s created some excellent buying opportunities in the REIT sector – particularly with high quality issues that pay 6% and even 7%. There’s no way rates are getting that high any time soon, but these high yielders have sold off with the rest of the sector.

Aside from selling the segment blindly over the past nine months, there are two common mistakes most investors make when considering REITs:

  1. They don’t demand a high enough yield. The VNQ fund is a great example – 4% is not quite enough income. We want REITs that pay at least 5% and preferably 6-7% so that we can earn double-digit returns on our initial capital as soon as possible, thanks to…
  1. Dividend growth. Most investors overlook this when it comes to REITs, leaving money on the table. The best REITs will not only pay us a healthy yield if you buy them when they’re cheap, but they’ll also increase that payout every year.

My favorite REITs operate in the booming healthcare market. There’s a bull market in elderly Americans unfolding, and it will run for at least two or three decades. Here’s what driving the America-is-getting-older trend:

  • There are 77 million Baby Boomers who just started retiring.
  • These seniors are living longer than ever – the Society of Actuaries recently amended its mortality tables to give a 65-year-old male a life expectancy to age 86.6 and a 65-year-old woman a life expectancy to age 88.8.
  • The 85+ populations will triple over the next 30 years.

The Bull Market in Elderly Americans Will Continue for Decades

US Population DataThe longer everyone lives, the more likely it is that they’ll need healthcare. It’s a good place to be a landlord, and should continue to be for decades, regardless of what happens to interest rates. Here are three to consider:

Health Care REIT (HCN) owns and operates senior housing and medical care facilities. Since inception as the first healthcare REIT in 1970, HCN has returned more than 15% annually to shareholders. It pays a 4.9% annual yield today and has increased its dividend every year since 2010, including two raises this year. There are plenty of growth opportunities left, as HCN owns just 2.4% of the $1 trillion health care real estate market today. And it sports a payout ratio of just 75%, which is low for a REIT (80-90% is more common).

Ventas (VTR) plays in the same space as HCN and has likewise delivered its investors a 15% return over the last 10 years, thanks to steady dividend payouts and increases. Ventas yields 5.1% today and has plenty of upside with a current 65% payout ratio,

Finally Healthcare Realty Trust (HR) is a steady dividend payer yielding 5% today. But its dividend has been flat since 2010 (and was actually higher in 2009) and the company has the highest payout ratio of the three at 78%.

I like HCN and VTR on pullbacks, as I prefer to buy these issues when their yields are closer to 6%. That doesn’t happen often since these stocks are more commonly in favor than out.

In the meantime, I recently recommended two other “pure play” REITs in senior care to my premium subscribers – both pay north of 6%, and have excellent prospects for dividend growth too. Get their names and discover the “secret” system I use to find an endless stream of overlooked high-yielders here.