Earn 10.3% Yields From This Fast-Growing Sector
June 7, 2018
Healthcare Is Paying Dividends
Got a watch with a second hand?
Tick. Americans just spent $111,000 on healthcare.
Tick. $111,000 more.
Tick. Another $111,000.
$6.7 million a minute. Every minute, all day long. All night long. Every second. Every minute. Every hour.
In 2018, Americans will spend $3.5 trillion on healthcare. To put that number in perspective, that’s a larger figure than the entire economic output of France.
And that market will likely continue to grow. Analysts project that healthcare spending will rise by 5.5% annually over the next decade, according to a recent report by The Centers for Medicare and Medicaid Services. By 2026, they project that healthcare spending will reach $5.7 trillion and account for nearly one-fifth of the country’s economy. (Source: “U.S. healthcare spending to climb 5.3 percent in 2018: agency,” Reuters, February 14, 2018.)
The biggest drivers of this boom come down to a story you’ve probably heard before: baby boomers. By 2035, people 65 years and older will outnumber children 18 years and younger for the first time ever. The U.S. Census Bureau predicts that, by 2060, the number of seniors in America will top 100 million. That’s nearly double the 65+ population today. (Source: “An Aging Nation,” United States Census Bureau, April 10, 2017.)
In most cases, older people need more medical care. People over age 75 spend three to four times as much on healthcare than the rest of the population. To meet the surging demand for healthcare services, the country will need more doctors, more hospitals, and more medical supplies.
But the other big driver of healthcare spending has received much less coverage: millennials. This demographic is now the largest generation in U.S. history. And as Generation Y begins to settle down and start families, analysts project that this group will take up a greater slice of the medical sector.
For investors, those sales numbers constitute a seriously big investment opportunity. Over the long term, healthcare stocks have delivered healthy gains (pun not intended) to investors. Over the past 10 years, Health Care SPDR (ETF) (NYSEARCA:XLV) delivered a total return (including dividends and capital gains) of 210%. That crushed the returns of the broader S&P 500 market index, which has delivered a gain of only 99.5% over the same period.
But what really wins me over to healthcare stocks is that they make reliable sources of income. During the same reporting period, dividends paid out by healthcare companies more than doubled. More importantly, those payments continued to roll in, even through the height of the financial crisis.
And those returns will likely continue. Despite growing faster than the broader economy, healthcare stocks, as a whole, currently trade for less than the overall market.
Today, the S&P Health Care Index trades at about 15 times estimated earnings for the coming 12 months. The S&P 500, by comparison, trades at around 20 times forward earnings.
So, where can investors find the best income opportunities?
Senior housing represents one of the best sources of yield. As America gets older, we’ll need more nursing homes, more retirement communities, and more assisted living facilities. For this reason, landlords like Welltower Inc (NYSE:WELL), Senior Housing Properties Trust (NASDAQ:SNH), and Sabra Health Care REIT Inc (NASDAQ:SBRA) pay out high-single-digit (and growing) yields.
Manufacturers of healthcare supplies and equipment have found themselves smack dab in the middle of this boom.
Blue-chip businesses like Johnson & Johnson (NYSE:JNJ), Medtronic PLC (NYSE:MDT), and Becton Dickinson and Co (NYSE:BDX) don’t pay out the biggest upfront yields. But with their payouts growing at a double-digit pace for the foreseeable future, these modest dividends could become quite the sources of income.
Finally, investors should take a second look at big-pharma names like Pfizer Inc. (NYSE:PFE). Traders overlook this business because it doesn’t have an exciting pipeline of new drugs. Yet, shares crank out a four percent dividend. And, with an aging population, demand for the company’s products (and by extension the distribution) will likely remain robust.
| Company | Market Cap ($ Billion) |
Yield |
| Welltower Inc | $21.5 | 6.5% |
| Senior Housing Properties Trust | $4.2 | 10.3% |
| Sabra Healthcare REIT Inc | $3.7 | 10.2% |
| Johnson & Johnson | $327.1 | 2.6% |
| Medtronic PLC | $118.5 | 2.1% |
| Becton Dickinson & Co | $61.0 | 1.3% |
| Pfizer Inc. | $213.2 | 3.8% |
(Source: Yahoo! Finance, last accessed June 5, 2018.)
To be clear, the table above doesn’t constitute a list of “buy” recommendations. For one, some of these stocks look a little expensive right now and they don’t represent a good place to put fresh money to work.
That said, this list does present a good place to begin further research. Healthcare will likely be the biggest investment trend of the next generation. And if you’re looking for safe sources of growing income, this is a good place to start searching.
