Brett Owens, editor of Contrarian Outlook, uncovers two under-followed healthcare plays — a closed-end fund and a real estate investment trust — offering high and safe yields for long-term income investors.
Tekla Healthcare Opportunities Fund (THQ), a little-known closed-end fund which holds some of the top names in the healthcare sector, has clobbered the market this year. But thanks to the correction, healthcare has pulled back from highs in January and early October, opening a nice buy window.
The fund, launched in 2014, has poached an all-star team of doctors and researchers from the likes of Merck & Co. (MRK) and Johnson & Johnson (JNJ) to work with its own financial whiz kids.
Their expertise is showing up in results; so far this year, it’s bagged a 7% total return (with dividends included). That kind of performance, during a very volatile year, is just the kind of field test we want from a “forever” retirement play.
And THQ’s monster dividend gets further support because the fund’s market price is 9.2% lower than its net asset value (NAV, or what its portfolio is worth on the open market). This discount is a quirk of CEFs that gives us both price upside (that gap has narrowed to as little as 5.8% in the last 2 years) and downside protection.
For income-seekers, the upshot is that thanks to this markdown, the only yield that matters is the yield on NAV (or what management must get from the portfolio to maintain the payout). Right now, THQ’s yield on NAV sits at 7.1%, a much easier bar for the team at the top to clear.
The bottom line? THQ boasts a monthly 7.7% dividend, top-flight management and high-quality portfolio in a sector with plenty of upside, thanks to the wave of retiring baby boomers. That makes it a great fund to buy now, before its discount narrows further.
Of course, big-cap healthcare stocks aren’t the only way to tap big gains (and income) from this cash-flush sector. Another option: Go straight to these companies’ “landlords” and grab a big chunk of the rent the collect every month in cash.
How? Through healthcare REITs, owners of the labs, medical offices and hospitals everyone from big pharma to your family doctor counts on. And you can bet these properties will stay hot no matter what the economy does.
Physicians Realty Trust (DOC), sailed through the October swoon while the market fell on its face. DOC sits on a portfolio of 249 medical-office buildings across 30 states, almost all of which (97%) are rented.
The trust isn’t only diversified by territory: it also gives you an extra layer of safety by spreading its properties across a long tenant list, with no single occupant chipping in more than 6% of annualized base rent.
Which brings me to the trust’s dividend, which clocks in at a gaudy 5.4%. Sure, that doesn’t quite hit the same level as THQ, but there’s room for growth: funds from operations (FFO, a better indicator of REIT performance than earnings) are surging: up 27% since the first quarter of 2016.
And I’m sure you know that healthcare spending is exploding—and that will push up demand and rents (and by extension FFO and dividends) even more Meantime, this payout is safe, at 86% of trailing-12-month FFO, easily manageable for a steady Eddie like DOC.
And let me leave you with this: even though it aced the downturn, you can buy DOC at just 16-times FFO. That’s a smoking deal, given the REIT’s defensive chops and room for upside in both the share price and the dividend. Grab this one now and lock in its “pullback proof” 5.4% payout today.
