Real estate investment trusts (REITs) are one corner of the stock market known for high dividend yields. Healthcare REITs are one of the most compelling opportunities in the sector when it comes to achieving both income and growth, so here's a bit about the healthcare REIT industry and three stocks that all yield over 5% that are worth a look. 

Why healthcare real estate? 

REITs can be a great way to achieve a nice combination of income and growth in your portfolio. Healthcare real estate is a particularly compelling opportunity for three key reasons:

  1. Healthcare real estate is a defensive investment, meaning that it performs well no matter what the economy is doing. In other words, when times get tough, consumers tend to cut back on shopping in malls and staying in hotels. However, they still need healthcare services.  
  2. The demographic trends favor several decades of continued healthcare demand growth. Specifically, the senior citizen population in the U.S. is expected to roughly double over the next 35 years, and the 85-and-older age group is expected to double in just two decades. Older people use healthcare more frequently, and also spend more when they do.  
  3. There is tremendous room for consolidation in healthcare real estate. The existing healthcare real estate market is estimated to be worth about $1.1 trillion, and only about 15% of that is owned by REITs. For comparison, hotels and malls are over 40% REIT-owned. So, there's lots of room for strategic growth through acquisitions. 
Stethoscope on top of money.

Image source: Getty Images.

With that in mind, here are three rock-solid healthcare REITs, all of which yield more than 5%, that you may want to put on your radar now.  

Company 

Recent Share Price 

Market Capitalization 

Dividend Yield 

Welltower (NYSE:WELL) 

$69.14 

$26.0 billion 

5% 

HCP Inc. (NYSE:HCP) 

$28.60 

$13.4 billion 

5.2% 

Physicians Realty Trust (NYSE:DOC) 

$16.78 

$3.1 billion 

5.5% 

Data source: CNBC. Prices, market capitalizations, and dividend yields as of Nov. 7, 2018. 

Amazing long-term potential with a leading market share 

Welltower is the largest healthcare REIT in the market, and as such, it enjoys the efficiency advantages that come with scale, as well as more financial flexibility than most of its peers.  

The majority of Welltower's portfolio of roughly 1,300 properties is composed of senior housing and other senior-specific properties. As I mentioned before, the 85-and-older age group is projected to grow especially fast over the coming decades, and this age group is the sweet spot for senior housing. The high concentration in senior housing means that Welltower is more vulnerable to issues related to that type of property -- such as oversupply -- but over the long run, demand should create lots of growth potential. 

Welltower has a 47-year track record of strong returns and dividend growth, and has performed well through a variety of economic and regulatory environments. I wouldn't expect any different going forward.  

Excellent diversification and lots of growth potential 

HCP is the REIT on this list that I own in my personal stock portfolio, and I don't plan on getting rid of it anytime soon.  

HCP is one of the larger healthcare REITs, and I like it for its diverse portfolio of high-quality healthcare properties. Instead of concentrating in just one type of healthcare real estate, HCP invests in a blend of senior housing, medical offices, and life science facilities. It also has the largest concentration of private-pay tenants of the REITs discussed here. Private-pay healthcare revenue tends to be far more stable and predictable than revenue depending on government reimbursements like Medicare or Medicaid.  

In recent years, HCP has undergone quite a transformation, and has emerged as one of the strongest and most diversified REITs in the industry. The company got rid of its riskiest assets, reduced its concentration to its largest tenants, and took steps to improve its balance sheet. Now, HCP has largely achieved its goals and is ready to resume its growth trajectory. Starting in 2019, HCP plans to spend $300 million to $400 million per year on property development. 

Medical offices have lots of consolidation opportunity  

Physicians Realty Trust is a relatively small healthcare REIT compared with the other two. It invests in medical office properties. The company's strategy is to leverage its relationships with healthcare systems and physicians to find the best investment opportunities. And, because of its smaller size, it can focus on acquisition opportunities that are smaller than the others would go after.  

I mentioned that there's lots of room for consolidation in healthcare real estate, and that's especially true in medical offices. Lots of medical offices are owned by health systems, or by the physicians who practice in them. In its relatively short five-year history, the company has grown impressively, and in recent years has spent about $1 billion per year on acquisitions, and I'd be surprised if it slowed down considerably anytime soon.

Matthew Frankel, CFP owns shares of HCP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.