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Forget Dow Dogs, REITs Are More Faithful

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Dogs of the Dow, an investment strategy popularized by Michael B. O'Higgins in 1991, has been the darling of yield-seeking investors as it guarantees steady return irrespective of the market condition. How does that happen?

The Dogs of the Dow are basically the top 10 dividend-paying blue-chip stocks of Dow Jones Industrial Average (DJIA). The built-in dividend income strength and good reputation of these companies ensure a strong price appreciation. But their high dividend is the key attraction.

Who are the dogs this year and how much did they yield last year? The list has AT&T, Inc. (T - Free Report) with a dividend yield of 5.4% , Verizon Communications Inc. (VZ - Free Report) – 4.3%, Merck & Co. Inc. (MRK - Free Report) – 3.1%, Intel Corporation (INTC - Free Report) – 3.6%, McDonald's Corp. (MCD - Free Report) – 3.3%, Pfizer Inc. (PFE - Free Report) – 3.0%, Chevron Corporation (CVX - Free Report) – 3.4%, Cisco Systems, Inc. (CSCO - Free Report) – 3.0%, General Electric Company (GE - Free Report) – 3.1% and Microsoft Corporation (MSFT - Free Report) – 2.4%. All these stocks have yielded much higher based on the share price on Feb 20, 2014, than the current 10-year Treasury note yield of 2.76%.

What About REITs?

If the blue-chip tag is taken out of these Dow favorites, the U.S. real estate investment trusts (REITs) look more promising in terms of dividend yield. Notably, the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. Yield-hungry investors thus have a large appetite for such stocks.

In fact, among the REITs, there are three stocks that yielded higher than Dogs of the Dow in 2013. While these are much smaller in size and scale, they impress investors no less with their dividend story. All these are healthcare REITs, so a significant loss due to price depreciation should not be a concern. In fact, the chance of outperformance is high for these REITs with the potential growth of the healthcare sector.     

Is Healthcare Sector Recession Proof?

The healthcare sector offers stability amid volatility, as even in tough economic conditions customers cannot compromise on healthcare spending. They will instead make lesser discretionary purchases.

Additionally, the Affordable Care Act would substantially increase the number of new insured individuals thereby raising the demand not just for healthcare facilities, but also for properties offered by healthcare REITs.

Another positive factor is the forthcoming wave of retiring baby boomers. Often cited as a threat to the U.S. economy, the retiring generation is actually a boon to the healthcare sector. This is because senior citizens spend 200% more on healthcare than the average population.

These REITs are also likely to benefit from the projected 7.4% rise in national health expenditures in 2014, according to Centers for Medicare and Medicaid Services. Moreover, the federal agency projects health expenditures to see compounded annual growth rate of 6.2% from 2015 through 2021.

Favored by the government and indispensible to the society, the healthcare REITs are comparatively immune to macroeconomic problems faced by other sectors such as office, retail and apartment.

3 Faithful REITs

The three healthcare REITs that bettered Dogs of the Dow in terms of yield and carry a favorable Zacks Rank warrant a closer look.

Omega Healthcare Investors Inc. (OHI - Free Report)

This Zacks Rank #2 (Buy) stock has a consistent track record of increasing shareholders' wealth and has hiked dividend 27 times since first-quarter 2004. The most recent was a 2.1% sequential hike in quarterly cash dividend. Based on the share price of Feb 20, the company yielded 6.0% in 2013.

Given the encouraging results in the trailing four quarters (average earnings surprise of 4.17%), Omega Healthcare seems well placed to continue paying decent dividends in the future.

Sabra Health Care REIT, Inc. (SBRA - Free Report)

This Zacks Rank #1 (Strong Buy) stock has steadily increased its dividend payout in the beginning of every year since 2011, with the most recent being a sequential hike of 5.9%. Based on the share price of Feb 20, the company yielded 4.9% in 2013.

With a strong focus on enhancing its skilled nursing and senior housing facilities portfolio, the company has attained an average earnings surprise of 3.8% in the trailing four quarters. Based on this, the company looks poised for further dividend hikes.

Healthcare Trust of America, Inc. (HTA)

Another Zacks Rank #2 stock, Healthcare Trust benefits from its strong focus on medical office buildings (MOBs), which protect it more from economic risks than other healthcare REITs. Based on the share price of Feb 20, the company yielded 5.4% in 2013.

Also, the company’s focus on buying mid-sized premium assets in markets with prominent healthcare systems should drive its profitability in the long run. The estimated long-term growth rate for this stock’s fund from operation is 4%.

In Conclusion

The Dogs of the Dow will always enjoy the top-pick status courtesy of their assured price elevation. But if you are a dividend lover, it’s time to switch to these REITs. Don’t worry about your capital protection; the bright prospect of these stocks should not disappoint you. With improving economic fundamentals, we foresee these REITs capitalizing on the uptrend.

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