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Graying U.S. Delivering Green Via Senior Housing REITs

With all the uncertainty surrounding the eurozone, the fiscal cliff and China’s growth, it’s nice to know there’s one thing you can still count on: the slow, endless march of time.

We all grow old, we all need care as we age — and thanks to the demographic shift caused by the aging baby boomers, we all are going to have to come to grips with an influx of older Americans and their geriatric needs very quickly.

According to the Administration on Aging, the population of Americans over age 65 numbered 34 million in 2000, 40 million in 2010 and is projected to hit 55 million in 2020. You simply can’t fight a trend like this.

So why not capitalize on this megatrend as an investor by focusing on investments that serve our aging boomers?

One of my favorite investment flavors for this trend is senior housing, particularly via dividend-rich real estate investment trusts. Senior housing REITs operate senior living facilities and related healthcare services, which is a great industry to be in. And thanks to their special tax status, they must deliver 90% of their taxable income back to shareholders via dividends. It’s a recipe for excellent share appreciation and good income over time.

Here are three winners to consider in the senior housing REIT space:

Senior Housing Properties Trust

Dividend Yield: 7%
Market Cap: $4 billion

Senior Housing Properties Trust (NYSE:SNH) owns about 370 properties nationwide that focuses on mainly on senior living, but also leases a bit of space to clinics and biotech labs. This focus on boomer care is a great place to be in to capitalize from the demographic trend that is reshaping America.

Beyond big-picture demographics, a separate reason to like this senior housing REIT is the fundamentals. The company has rapidly expanded, helping revenue double from 2008 to current levels. Earnings have remained fairly subdued, but the company just boosted its dividend from 38 cents to 39 cents a quarter, so the income stream is safe. More importantly, these big investments will pay off nicely in the long term. Senior Housing Properties did offer another 12 million shares this summer to pay back debt, but shares have remained firm and there doesn’t appear to be any major dilution to shareholders.

HCP Inc.

Dividend Yield: 4.4%
Market Cap: $20 billion

HCP Inc. (NYSE:HCP) is significantly larger than many other healthcare REITs, and a bit more diversified. It operates not just senior housing but also medical offices and even hospital space. But in October, it just closed a $1.7 billion acquisition of Emeritus Corporation to gain some 127 senior housing facilities, and the aging boomer population plays right into this company’s growth plans.

Revenue is up year-over-year in six of the last seven quarters, and earnings are moving up nicely, too. There is a risk the dividend might be stretching HCP thin, since its $2 annual payout is neck-and-neck with annual earnings; however, the scale and strong dividend history should put concerns to rest. HCP has paid dividends quarterly since 1985, and has increased its payout every year or so like clockwork since 2004. Based on that track record, the 50-cent payday may be due for a bump next quarter.

Ventas

Dividend Yield: 3.9%
Market Cap: $19 billion

Ventas (NYSE:VTR) owns healthcare properties throughout the United States and Canada, with senior housing properties making up about half of its total facilities. The rest are related healthcare sites like hospitals, skilled nursing centers and medical office buildings. Ventas made a very aggressive move in 2011 to purchase Nationwide Health Properties for $7.6 billion — and though the acquisition isn’t old enough to allow for easy year-over-year comparisons, it’s worth noting that the current company is one of the largest and most well-positioned for growth in the long-term after this deal.

The dividend has jumped from 47.5 cents quarterly to end 2007 to 62 cents a share currently — a nice 30% hike in just five years — which shows how this REIT continues to deliver cash back to shareholders even as it aggressively expands.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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