A huge demographic shift meets a cash-gushing investment vehicle
In late May, we wrote a Digest that referenced “the biggest no-brainer investment idea of the next 30 years.”
It detailed a simple market approach that could help you earn big income streams for decades, without you having to trade in and out of stocks, time the markets, or do anything complicated.
In fact, the more sloth-like you are, the better. That’s because the benefits of this strategy increase in direct proportion to your patience. It’s “set it and forget it” investing at its finest.
But when you get this right, then give your investment time to develop, you’ll have set yourself up to enjoy a massive passive income stream that’s all but guaranteed.
From that Digest:
That’s because what’s driving this investment idea is a huge tailwind … a gale-force tailwind. It’s a demographic reality that’s reshaping our society — and will continue to over the coming decades — regardless of whether you’re invested alongside it or not.
But let’s make sure that you are.
It turns out this investment idea has been nicely outperforming the S&P since that Digest issue. Several specific investments have recently broken out to new highs.
So, today, let’s revisit the idea in case you missed it the first time, then identify those specific investments that are outperforming. After that, we’ll turn to our own Neil George, who has this particular market approach in his crosshairs.
If you set yourself up alongside this tailwind today, your finances of tomorrow could be far more secure.
Let’s jump in.
***For great returns, we need to invest today where the money will be tomorrow
So, where’s that?
At the intersection of where an aging U.S. population with increasing health care demands meets a tax-advantaged investment vehicle that’s designed to churn out cash.
In other words, health care and assisted living REITs that service our Baby Boomers.
The demand for this product is going to be off-the-charts … and only increasing.
As to “why?”, it just boils down to numbers.
From our earlier Digest on this topic:
10,000 Baby Boomers are retiring every day (hitting 65 years of age).
Right now, that means there are roughly 40 million Americans aged over 65. That’s about 13% of the population.
By 2050, that number will more than double to around 88.5 million.
But let’s narrow in …
Of our elderly population, about 5.7 million Americans are over age 85. By 2050, this number will more than triple to 19 million. And a full 50% of them will need assistance with daily functioning which, in most cases, means an assisted living facility or a skilled nursing home.
The cost for those services can run anywhere from $60,000 to $180,000 per year.
***This will place huge financial strain on our seniors, and significant operational strain on our healthcare system
Even right now, elderly people are the biggest consumers of healthcare resources. Reports suggest they comprise 35% of all hospital visits … 38% of emergency medical responses … 90% of nursing home care … and 34% of prescription usages.
These huge numbers make more sense when taking into account that around 60% of Boomers have been diagnosed with either arthritis, diabetes, heart disease, and/or hypertension. In other words, there’s a monsoon wave of Boomers heading toward hospitals, medical centers and aged care homes.
Here’s the takeaway from our prior Digest:
The bottom line: we have a massive and growing demand for health-related services for our Boomers. This will include retirement communities, assisted living facilities, nursing homes, and mixed use planned communities that market, in part, to senior citizens.
***Enter REITs, a tax-advantaged investment vehicle that’s specifically designed to churn out cash
REITs (real estate investment trusts) are businesses that own income-producing real estate in all sorts of real estate sectors — think single family homes … apartments … offices … and yes, health care related properties.
Most REITs own dozens of properties in different geographical areas. For example, the big shopping mall REIT Simon Property Group owns hundreds of malls across America. The big office REIT Boston Properties owns over 150 office buildings across America. The big apartment REIT Equity Residential owns over 70,000 apartment units across the country.
You know how ETFs allow investors to own big groups of stocks with just one click in a brokerage account? You can think of REITs like ETFs for properties.
To be considered a REIT by the government, a company must pay out at least 90% of its taxable income to its shareholders. This means that REITs can be a great source of cash-flow for investors like you and me.
***REITS offer investors lots of benefits that don’t come when owning a single stock
From our prior Digest:
… there’s greater diversification (since you’re investing in many properties all at once) … more price stability (you rarely see huge price swings in quality REITs because real estate isn’t a volatile investment like a high-flying tech stock)… and of course, the greater yields — which is what’s driving the wealth creation in this case.
As mentioned a moment ago, to qualify as a REIT, these businesses must pay out at least 90% of taxable income to shareholders. This usually means fat dividend checks.
For example, according to Nareit (National Association of Real Estate Investment Trusts), the average REIT dividend yield is currently 4.06%. Compare that to the average dividend of the S&P 500 — currently 1.88%.
But with Boomers retiring in such numbers that demand for medical-related properties will be skyrocketing, why would we assume our returns will only come from dividends?
***In fact, if you look at REITs historically, their compound rate of return beat all other sectors
It surprises many investors, but if you take five major asset classes — U.S. stocks, international stocks, long-term government bonds, Treasury Bills, and REITs — and compared their compound rate of return since 1972, REITs win out.
Below is a chart from the research firm Morningstar comparing returns for these asset classes from 1972 through 2017. It assumes a hypothetical investment of $1 in each asset class in 1972.
As you can see, REITs returned the most, leading the way with a compound annual return of 11.8%.
If we take a hypothetical $25,000 investment and put it into a basket of REITs yielding 11.8% for 47 years (from 1972 until today in 2019), we’d be sitting on a staggering $4.7 million portfolio.
***This outperformance has been continuing during the recent market volatility
Let’s now turn our attention to what’s been happening with health care REITs in recent months.
Three that are performing especially well are Welltower (WELL), Ventas(VTR), and HCP Inc (HCP).
While the S&P is up 15.6%, Welltower, Ventas, and HCP are up, respectively, 30.3%, 25.6%, and 25.8%.
Now, let’s zero in on the market performance of these REITs since our last Digest in late May.
The chart below is a bit busy, so here’s the takeaway: The S&P is up 4.2%. Meanwhile, Welltower, Ventas, and HCP are up, respectively, 10.9%, 13.2%, and 10.0%. In other words, the health care REITs have more than doubled the S&P’s gains since we featured the sector in the Digest.
Meanwhile, all three REITs are trading at or just below 52-week highs, despite last week’s volatility.
***The long-term potential of this investment opportunity
In our earlier Digest on this investment approach, I included a conversation I’d had with our CEO, Brian Hunt, in which he made a bold comment:
Jeff, if you held a gun to my head and made me invest in just one investment theme for the next 30 years, I’d probably pick “sell health care and assisted living services to Baby Boomers.” Let others speculate on long shots. I’ll take the guaranteed big money.
All we’re doing with health care-related REITs is investing alongside demographics and demand, using REITs, which have historically been a major money-maker. It’s hard to argue with that combination.
***Our own Neil George, editor of Profitable Investing, has health care REITS on his radar and in his portfolios
Neil begins by detailing the challenge that many Americans are facing these days with their health, as well as related health care costs.
The U.S. is a nation that is aging and becoming ever less healthy. This isn’t a good mix for one of the leading economies of the planet. In a recent study by the U.S. Department of Commerce and the U.S. Census, by 2035 which is not that far away it is projected that 78 million folks will be 65 years or older. And by that same year, those at or under the age of 18 years will be 76 million.
This will be a significant change in the demographics of the nation which has traditionally been a younger nation with more healthy and able folks to produce more for the economy.
After providing additional details on the health challenges, Neil turns toward the investment implications. It turns out, Neil has already recommended one of the health care REITs featured in this Digest to his Profitable Investing subscribers — Ventas.
Also, I have Ventas (VTR) which as a real estate investment trust (REIT) owns a series of senior healthcare and related housing care facilities that is doing quite well with the general REIT sector as we move further into 2019. Revenue continues to expand at a steady rate with the three-year average annual growth rate for its healthcare properties running at 9.27%.
The return from fund from operations (FFO) which looks at the profits from the core properties operations is a healthy 12.90%. This in turn is fueling the ample dividend distribution of 79.25 cents for a yield of 4.43%. The distribution continues to gradually climb over the past five years at an average of 2.17%.
And it has been a good generator of not just dividend income but overall growth as well. The five-year total return is running at 65.08% for an average annual equivalent return of 10.53% per year.
As Ventas hits a fresh 52-week high, a big congrats to Neil and his subscribers. There are several other health-care related investments that combine income and growth in Neil’s Profitable Investing newsletter. To learn more, click here.
At a minimum, take some time to consider health care REITs as a part of your portfolio. Over the next few decades, this will be as close to “layup” investing as you get.
Have a good evening,