3 Top High-Dividend Stocks on Sale This Quarter

If a healthy combination of dividends and growth is what you're looking for, the real estate sector could be the place to find it. One of my favorite long-term investments is healthcare real estate, as the industry has amazing long-term growth opportunities as the U.S. population ages and healthcare demand grows.

However, many healthcare real estate investment trusts, or REITs, have significantly underperformed the market in 2017, due to overall sector weakness and oversupply fears in the senior housing industry. With that in mind, here are three high-dividend healthcare REITs that are trading at a nice discount right now.

Data source: TD Ameritrade. Dividend yields and performance as of 10/22/17.

One of the biggest in the business

When it comes to healthcare real estate, there are three big players: Welltower, Ventas, and HCP (DOC 0.98%). Of the three, I prefer HCP for its mix of property types, as well as its high concentration of private-pay revenue sources, which are generally more predictable than healthcare revenue that depends on government reimbursement.

HCP has about 800 properties, the majority of which can be categorized as senior housing, life science, or medical offices. 95% of the portfolio's tenants derive their revenue from private-pay sources, which, as I mentioned in the introduction, is more stable and predictable than revenue dependent on government reimbursements.

Over the past couple of years, HCP has undergone quite a transformation that has resulted in a more focused and stable operation, as well as a much better financial state. Specifically, the company spun off its riskier assets into a newly created REIT called Quality Care Properties (QCP), reduced its concentration in its top tenants, and reduced the debt on its balance sheet.

Before the QCP spinoff, HCP had a quarter-century streak of consecutive dividend increases. Although the spinoff forced a dividend reduction, HCP's diversified and stable portfolio should generate many years of growing income for investors going forward.

Image source: Getty Images.

An up-and-comer with a unique approach

Physicians Realty Trust (DOC) is the smallest of the three REITs discussed here, and with its IPO in 2013, it's the newest one as well. However, the company's growth has been impressive, and its unique strategy sets it apart from competitors.

The company focuses on medical office properties and owns over 250 properties located in 30 states, and the tenant group is well-diversified. Since the 2013 IPO, when the company started out with $100 million in assets, more than $3 billion has been invested in acquisitions, and management says it expects to put an additional $1 billion or so to work each year going forward.

Physicians Realty Trust's strategy is to leverage its management team's relationships with doctors and health systems to find opportunities that are either unknown to the industry's large players (off-market properties), or are too small to attract their interest.

If you want maximum income from your investments

Despite its name, Senior Housing Properties Trust (DHC) doesn't just invest in senior housing. In fact, its portfolio is nearly a 50/50 split between senior housing and medical office properties. The company's 97% private-pay revenue mix is among the best in the industry, and the highest of the three companies mentioned here.

At first glance, you may be skeptical of the company's ­­8.4% dividend yield, and to be fair, you should be. Often, dividend yields like this are not sustainable.

However, that's not the case with Senior Housing Properties Trust. The company's expected 2017 FFO is more than enough to cover the dividend, and in fact, the 83% FFO payout ratio is actually quite reasonable (but not low) for REITs. While the dividend hasn't been increased in a few years, there's certainly no reason to expect the payment to be cut anytime soon, making Senior Housing Properties Trust worth a look for investors who want to maximize their income while still maintaining some upside potential.

The opportunity in healthcare real estate

I mentioned in the introduction that healthcare real estate could be a compelling long-term opportunity because of the industry's growth potential. To add some more color to that, here are some of the top reasons to invest in healthcare REITs:

• The 65-and-older population in the U.S. is expected to roughly double over the next 40 years. This will create a steady rise in the need for healthcare. What's more, the 85-and-older age group is expected to double in half that time, and this group is the target demographic for senior housing.
• The healthcare real estate industry is also highly fragmented, meaning no company has an enormous market share. In fact, the largest player (Welltower) has about 3% of the U.S. healthcare real estate market, and less than 15% of all healthcare properties are REIT owned. Healthcare real estate is a $1.1 trillion market, so there is lots of room for growth within the current inventory.
• Healthcare real estate is perhaps the most defensive type of commercial real estate. Most tenants are on long-term net leases, which minimizes turnover and vacancy risk, and healthcare itself is a recession-resistant business. In other words, people can choose to stop shopping at malls, or move to a smaller apartment if times get tough. Healthcare is generally one of the last things people want to cut.

The bottom line is that not only is healthcare real estate a relatively safe type of asset, but it has enormous and long-tailed growth potential.