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3 High-Yield Healthcare Stocks Perfect for Retirement

By Cory Renauer – Sep 22, 2018 at 7:23AM

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The dividend yields on these healthcare REITs are too high to ignore.

The number of Americans over 65 years of age is expected to double to around 98 million by 2060. Senior Housing Properties Trust (DHC -0.35%)Omega Healthcare Investors (OHI 2.47%), and Medical Properties Trust, Inc. (MPW 3.67%) are all real estate investment trusts (REITs) that own medical buildings and housing facilities that an aging country is going to need a lot more of in the years to come. Here's why they're perfect investments for retirees or those of you excited about being one soon.

Senior Housing Properties Trust: Not exactly what you think

If you're looking for a retirement stock to deliver meaningful income right now, Senior Housing Properties Trust's huge 8.7% yield could have your name on it. The stock's favorable yield largely is due to concerns about oversupply for the types of properties this REIT's named for.

Happy looking retiree with lots of coins.

Image source: Getty Images.

Retirees eager to build a lasting income will be glad to know that Senior Housing Properties Trust derived just 14% of total net operating income (NOI) from the senior living communities it managed during the second quarter. Another 40% of NOI came from senior communities it owns but doesn't manage. These triple-net leased proprieties generally don't deliver as much revenue per square foot, but Senior Housing isn't responsible for most expenses that can change unexpectedly.

A growing population of senior citizens also needs a lot more medical attention, which is why Senior Housing has been building up its supply of medical office buildings. In the second quarter, 43.5% of NOI came from medical office buildings. 

The company used 87% of funds from operations (FFO) to make dividend payments over the past 12 months. That's a bit higher than investors would like, but it's still more than enough for the company to maintain dividend payouts at their present level and improve its property portfolio.

Dividends written on a hundred dollar bill.

Image source: Getty Images.

Omega Healthcare Investors, Inc.: A triple-net fan

Shares of this healthcare REIT have risen 19% this year, but it still offers an 8.1% yield at the moment. In June, Omega Healthcare Investors, Inc. was collecting rent from 67 nursing-home operators with facilities in 41 states.   

Unlike Senior Housing, all of Omega Healthcare's leases are of the triple-net variety. The stock tanked last year when a couple of its larger operators, including Orianna Health Systems, fell into arrears. Omega already has transitioned some of the properties to customers that can pay the rent, which helped management raise its full-year FFO outlook when it reported second-quarter results.

Before Orianna quit paying the rent, Omega raised its dividend payout every quarter like clockwork. The frozen dividend now works out to 87% of this year's raised FFO expectations, and I think a return to regular payout bumps could happen next year.

Although nursing-home occupancy has fallen in recent years, the culprit that led to Orianna's troubles was policy changes following poorly timed investments. Over the long run, though, demographic trends make this stock look just right for retirees.

A smiling elderly woman in a hospital bed holding hands with a young nurse.

Image source: Getty Images.

Medical Properties Trust: The hospital REIT

This healthcare REIT offers a 6.8% yield that might not be the biggest on this list, but it's the only one that doesn't have a frozen dividend at the moment. Medical Properties Trust, Inc. also stands out as an owner of hospitals, and it owns many. The REIT finished June with 277 properties, including a stake in 71 hospitals in Germany.

Hospitals aren't cheap to build, but their tenants sign long leases and rarely move. Medical Properties doesn't operate any hospitals itself but collects rent from 31 operators in the U.S. and Europe that do. Although it mainly acquires and develops hospitals, and then lets operators handle all the rest through a triple-net lease arrangement, around one-fifth of its assets are in the form of mortgages and loans to hospital operators.

Medical Properties only needs around 72% of the FFO it generated over the past year to make dividend payments at its present rate. The company's steadily increased its payout since 2013, and there's plenty of room to make further raises.

A steady flow of cash from its operators allowed Medical Properties to invest an impressive $2.2 billion into healthcare assets that totaled $8.96 billion at the end of June, which is awfully impressive for a REIT that didn't exist just 15 years ago. Medical Properties' assets are spread out wide, and 79% of its outstanding debt is at fixed rates that won't budge if interest rates spike, so retirees probably can look forward to more growth ahead.

Remember what to look for

Healthier lifestyles and medical breakthroughs mean your retirement will probably last a lot longer than your parents' retirement did. More than one-third of women who are 60 years old today still will need an income well into their 90s. That means you'll eventually need these stocks to raise their payouts if you're relying on them for income. Luckily, the aging population is likely to keep demand for senior housing, nursing homes, and hospitals on the rise for years to come.

Cory Renauer owns shares of Omega Healthcare Investors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Diversified Healthcare Trust Stock Quote
Diversified Healthcare Trust
$0.99 (-0.35%) $0.00
Omega Healthcare Investors, Inc. Stock Quote
Omega Healthcare Investors, Inc.
$29.49 (2.47%) $0.71
Medical Properties Trust, Inc. Stock Quote
Medical Properties Trust, Inc.
$11.86 (3.67%) $0.42

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