Let's say I told you that you could invest $10,000 today in a stock, and reinvest your dividends, and that your investment would be worth more than $680,000 in 45 years. Does that sound too good to be true? Well, that's exactly what healthcare REIT Welltower (NYSE: HCN) has done for its investors since going public in 1971.
Continue Reading Below
While a stock's historical performance isn't a guarantee of future results, here's why I think Welltower's next 45 years could be just as prosperous as the first 45.
Image source: Getty Images.
What Welltower does: The one-minute version
The best way to describe Welltower's business in a single sentence is this: Welltower invests in high-quality, stable healthcare properties located in attractive markets and then develops partnerships with some of the best facility operators who either lease the properties or operate them in partnership with Welltower.
After a recent portfolio repositioning, Welltower's portfolio consists of about 70% senior housing properties, including independent-living, assisted-living, and memory-care facilities. These are mainly located on both U.S. coasts, in high-barrier markets. The rest of the portfolio is divided among long-term/post-acute care properties and outpatient medical facilities.
A big part of Welltower's strategy is to invest in properties that are newer than the competition and located in more attractive areas. For example, Welltower's average U.S. senior housing property is 14 years old, while the average REIT-owned senior housing facility is 18 years old. And the median home value in Welltower's markets is more than double that of REIT peers.
Welltower maintains a strong balance sheet, and has excellent financial flexibility to pursue acquisition opportunities as they arise.
Abundant growth opportunities ahead
Perhaps the best reason to invest in Welltower is for the many growth opportunities it has now and will have in the decades to come.
For the time being, the healthcare real estate market is highly fragmented and in the early stages of REIT consolidation. No REIT has a higher market share than Welltower's 3%, and it's estimated that just 12%-15% of all healthcare properties are REIT-owned. The largest and most financially flexible companies in an industry have an inherent advantage when it comes to consolidation, so this should especially benefit Welltower as it seeks out attractive acquisition candidates.
Furthermore, the market for healthcare is expected to grow rapidly as the senior citizen population in the U.S., U.K., and Canada all skyrocket. In these markets, the 85-and-up population is expected to roughly double over the next 20 years. Seniors need healthcare services more frequently and spend more on their healthcare, which should especially benefit Welltower, since senior housing is its No. 1 property type.
Image source: Welltower.
In fact, the annual demand for new senior housing units is expected to more than triple over the next decade.
The projected demand growth for new senior housing units per year. Image source: Welltower.
Dividend and growth history
As I write this, Welltower pays a dividend yield of 5.3% per year. And as the title of this article suggests, the recently declared February 2017 dividend will represent the company's 183rd consecutive quarterly payment (I'll spare you the math -- that's almost 46 years). The payment was increased by a penny to $0.87 per quarter, which is just the latest in a long streak of dividend growth. In fact, over that nearly 46-year history, the dividend has grown by 5.7% per year, on average.
Image source: Welltower.
What's more, since its 1971 inception, Welltower has generated compound annual total returns of 15.6% -- a remarkable level of performance to maintain for over four and a half decades. I mentioned earlier that past performance doesn't guarantee future results, but it can be a good predictor. In other words, companies that perform well and increase dividends for decades have a better chance of doing so in the future than companies with shaky histories.
A defensive asset over the long run, but beware the short-term risks
In many ways, healthcare real estate is a defensive type of asset from a long-term perspective. Not only are most healthcare properties leased on a long-term net-lease basis, which minimizes turnover and variable expenses, but it can also make money in any type of economy. Think about it this way -- in tough times, people can stop going to the mall and stop staying in nice hotels. However, they always need healthcare.
On a short-term basis, however, Welltower and other healthcare REITs can be quite volatile. Just to name a couple of examples, rising interest rates can push Welltower's share price down, as can weakness with any of the company's operating partners. In fact, both of these things happened in 2016, which is why the differences between Welltower's highs and lows were so dramatic.
The point is that Welltower pays dividends like clockwork, and has a solid long-term business model. So as long as you approach the stock with a long-term mentality, you should do just fine. On the other hand, if you don't have five years or more to invest, you're better off looking elsewhere.
10 stocks we like better than Welltower When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Welltower wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017