Rising Dividends + Acquisitions = Winner

05/31/2013 9:45 am EST

Focus: REITS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

The only REIT in the S&P 500 Dividend Aristocrats, this company has great potential, says J. Royden Ward of Cabot Wealth Advisory.

In February of this year, I began a new Special Feature series entitled "A-List Dividends," designed to find safe, long-term dividend-paying investments with at least modest growth potential.

First, I included all the components of the S&P 500 Dividend Aristocrats Index, which contains all companies which have increased their dividends each of the past 25 years, and have a market cap of at least $3 billion. Currently, the index contains 54 companies in a wide variety of industries.

I added to the list by including another 31 new firms that have increased their dividends by 10% or more in each of the past ten years. Although the 31 companies have not increased dividends for 25 straight years, the ten or more years of increases have been at a fast and steady pace. Two of the companies, for example, have increased their dividends more than 20% per year on average during the past decade.

In the third step, I sought to whittle my list of 85 companies down to just a few. I looked for high-quality companies that will provide the best chance of outperforming the stock market indexes during the next six to 12 months. I required dividend yields to be 1% or more. I also wanted companies with excellent prospects for the year ahead.

My search turned up six companies, from the list of 85, which will provide safe, long-term investments with growing dividends and earnings. Here is a review of one of my A-List Dividend companies.

HCP (HCP), formerly Healthcare Property Investors, is a real estate investment trust started in Long Beach, California in 1985. HCP invests in real estate serving the health-care industry throughout the US.

The company's portfolio of assets includes senior housing, post-acute/skilled nursing and life science facilities, medical offices, and hospitals. The trust primarily generates revenue from long-term leases of its various properties.

Most of HCP's rents and other earned income are received under triple-net leases, or leases that provide for a substantial recovery of operating expenses. A triple-net lease, or NNN, requires the tenant to pay all taxes, insurance, and maintenance on a property.

HCP recently acquired 129 senior housing communities for $1.7 billion. Located in 29 states, the company's portfolio includes 10,077 units representing a diversified mix of 61% assisted living, 25% independent living, 13% memory care, and 1% skilled nursing. The purchase is expected to add noticeable EPS (earnings per share) in 2013. In addition, projects under development will continue to come online in 2013.

At 18.5 times current FFO (funds from operations), HCP shares are very attractive. FFO is defined as net income (earnings), minus depreciation and amortization. Most REITs use FFO as a measure of income, because their real estate holdings tend to increase in value over time, rather than decrease.

HCP recently increased its dividend by 5%; it now provides a hefty 4.0% yield. HCP has increased its dividend every year for the past 28 years. HCP is the only REIT included in Standard & Poor's elite list of Dividend Aristocrats.

The dividend is well-covered by EPS—the ratio of 75% is well below the REIT industry standard of 90%. I think HCP can be bought right now.

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