Will This Obamacare Play Keep Paying Big Dividends?

Thousands of stocks trade publicly, but only a few dozen have the mark of dividend excellence that comes with qualifying as a Dividend Aristocrat. For those rare companies that have managed not only to pay but to raise their dividends each and every year for at least a quarter century, the status of being a Dividend Aristocrat confers the prestige of giving shareholders a reliable stream of income.

Among Dividend Aristocrats, HCP (NYSE: HCP  ) is somewhat of an unusual offering. As a real-estate investment trust, HCP is required to pay out the vast majority of its income as dividends in order to retain its favorable tax status. But by investing largely in senior housing, nursing homes, and professional medical office buildings and related health-care real estate, HCP gives investors exposure to trends like the ongoing implementation of Obamacare and its potential impact on the entire health-care system. Let's take a closer look at HCP to see whether its dividend growth is likely to continue.

Dividend stats on HCP

Current Quarterly Dividend Per Share

$0.525

Current Yield

5.1%

Number of Consecutive Years With Dividend Increases

28 years

Payout Ratio

104%

Last Increase

January 2013

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Why HCP has been a strong dividend pick
HCP is one of the biggest health-care specialized real-estate investment trusts in the country. Like most of its real-estate peers, HCP got crushed during the financial crisis, but it nevertheless found ways to keep its dividend growth going. One reason why the REIT has done so well is that its focus area is somewhat less sensitive to economic conditions than most real estate, as the continual need for medical services and for places for retirees to live helps support consistent demand for HCP's properties. Moreover, with demographic trends in its favor, HCP can expect solid growth prospects as greater proportions of the baby-boom generation reach retirement age and start to take greater advantage of its facilities, and once senior-citizen residents get comfortable in their surroundings, they're somewhat less likely to change locations compared to younger people still in their careers making moves for work or personal reasons.

But recently, HCP's bull-market run has come to an abrupt halt, as the stock dropped as much as 30% between mid-May and earlier this month before bouncing back somewhat. The big rise in interest rates is largely to blame, as REITs in general have gotten hit hard as rising bond yields make their payouts look somewhat less attractive by comparison. The threat of Federal Reserve action to ease back on its bond purchases could raise financing costs for the REIT, hurting profits that are already at levels that are below the REIT's annual payout. The impact of those potential moves have rippled throughout the industry, as Health Care REIT (NYSE: HCN  ) , Ventas (NYSE: VTR  ) , and even the smaller National Health Investors (NYSE: NHI  ) have all posted big drops from recent highs over the past several months.

Moreover, HCP in particular has faced some struggles. Even though the company posted favorable guidance on funds from operations and funds available for distribution for the rest of the year, HCP's second-quarter results fell a bit short of the growth rates investors had hoped to see.

HCP Dividend Chart

HCP Dividend data by YCharts.

As you can see, HCP's dividend growth flattened out during much of the 2000s, but it has recently started to accelerate again. Its most recent increase of 5% represents a healthy addition to an already significant payout yielding more than 5%.

The big unanswered question is whether HCP, Health Care REIT, Ventas, and National Health Investors will all benefit from the implementation of Obamacare. On one hand, offering greater amounts of medical care should help the health-care real-estate industry generally. Yet with Obamacare largely targeting younger Americans rather than those already covered under Medicare, it's uncertain how much it'll matter whether the small proportion of younger residents that HCP and its peers serve will make a substantial difference in their bottom line.

When will HCP boost its payout?
With HCP having raised its dividend in January, it's unlikely that investors will see another increase before 2014. The key going forward will be making sure that HCP can bring in enough income to support its distributions. You can be sure that the REIT will take extraordinary steps to defend its Dividend Aristocrat status, but any signs of a permanent slowdown in growth could threaten its ability to do so in the long run.

HCP might not get a big impact from Obamacare, but many investors are still completely in the dark about the risks to their portfolio from the health-care law's reform efforts. The Motley Fool's special report, "Everything You Need to Know About Obamacare," takes a 360-degree look at how the law may impact your taxes, health insurance, and investments. Click here to grab your free copy today.

Click here to add HCP to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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