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How to Get Health Care Dividends Without all the Health Care Exposure

Source: Flickr / comedy_nose.

The healthcare market in the United States is in a state of flux. What isn't in a state of flux is the increasing need for medical facilities. One way to get into this market is to buy health care real estate investment trusts (REITs) like giant Ventas (NYSE: VTR  ) or HCP (NYSE: HCP  ) . But that exposes you to sector risk you may not want to take. Another option is industrial and office specialist Duke Realty (NYSE: DRE  ) , which happens to dabble in the health care area, too.

Big demand
The baby-boomer generation is a huge bubble in the Untied States' demographic profile. It's worked its way through society like a rat through a snake. With the cohort now starting to pass into retirement, it won't be long before it changes this feature of American life, just as it's changed so many others. While that could mean just about anything (who could have predicted free love, disco, and "hair" bands?) one thing is certain -- aging bodies need more medical care. That, in turn, means more medical facilities, such as nursing homes and medical office buildings.

Source: the American Colony Photo Department or its successor, the Matson Photo Service, via Wikimedia Commons.

Catching a wave
The health care REIT sector is the right place to be if you see this as an opportunity that shouldn't be missed. Ventas and HCP are two of the largest players in the space. Ventas owns nearly 1,500 properties and HCP has more than 1,150. Both have exposure to the senior housing, post-acute/skilled nursing, medical office building, and hospital segments. HCP has investments in the health sciences sector, too, an area that isn't a focus at Ventas.

Each of these companies offers a diversified one-stop shopping experience in the health care real estate sector. That, however, could be more sector specific risk than you desire. The large declines that Ventas and HCP have seen from recent share price highs is a prime example of why this might bother you.

HCP Chart

HCP data by YCharts

Another way to go
This is where Duke Realty comes in. While Duke isn't without its own real-estate risks, its portfolio of industrial and office buildings includes medical office space. The sector comprises about 15% of its portfolio, up from just 5% in 2009. The REIT considers medical office to be a "[g]rowth industry, recession resistant asset class."

Moreover, the bulk of Duke's portfolio is aligned with major hospital systems or on the grounds of a larger medical facility ("on-campus"). That's a strength shared by medical office specialist Healthcare Realty (NYSE: HR  ) . So Duke is taking the same approach as REITs that focus entirely on the medical office subsector.

Healthcare Realty points to the benefits of this approach. For example, between 1991 and 2011 outpatient care has grown from 24% of hospital business to 43%. That means there have been more visits to the doctors associated with hospitals since patients are in and out of the hospital in one day. In fact, Healthcare Realty specifically calls on-campus properties "lower risk."

So, in Duke, you get "low risk" health-care exposure without the concentration of a health care specialist. But you also get the expertise of a builder -- an area in which Duke has long differentiated itself. At the start of 2014, the REIT had 12 medical office properties under development all of which are 100% leased. So this segment will see growth without the need for acquisitions in 2014.

More than it seems
Clearly, if you are looking at Duke Realty you need to consider more than just its health care segment. But if you are looking at HCP, Ventas, or Healthcare Realty and are concerned about their singular focus, you would be well served by stepping outside the box and looking at Duke's growing medical office portfolio.

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  • Report this Comment On March 28, 2014, at 5:34 PM, PEStudent wrote:

    I would recommend either HCP or Ventas because of track record and preservation of capital.

    But I wouldn't recommend Duke if your primary concern is preservation of capital: lost most of it's value during the 2008 crash and hasn't recovered. I sold most of my Duke shares in 2006 (keeping some to keep my DRIP account active) to meet some initial expenses when I retired early so I got lucky and missed the crash

    But when more retirement income streams kicked-in, I decided to get out of Duke altogether and picked HCP because it has a steady slow-growth record with no danger signs in its income statement and balance sheet, barely fell in price during the 2008-9 crash, a near 6% dividend, it has raised dividends every year for (now) 29 years, and it's payout ratio is 72% of FFO (the REIT equivalent of cash flow) and very sustainable.

    Note that HCP and VTR both can be owned through no-purchase-fee DRIP's.

    HCP requires an initial $100 and any subsequent purchase must be at least $100 - which can be set up as an automatic monthly purchase from your checking account through Wells Fargo's The only BAD thing is that where most DRIPs invest your money within a week of receiving it, it sits as cash with HCP for 35 days.

    VTR also has a DRIP administered by with the following differences: the minimum initial or monthly purchase is $250 and Ventas sells shares to DRIP participants at a 1% discount to market price. That 1% effectively offsets the fact VTR offers a dividend with about 1% less yield than HCP.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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