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Summary

  • A depressed stock price is providing income investors with a solid entry point.
  • An improving AFFO dividend payout ratio provides more room for potential dividend growth.
  • The 5%+ dividend appears to be one of the safest in the industry.

HCP, Inc. (NYSE:HCP) is a fully integrated real estate investment trust (REIT) serving the healthcare industry. HCP acquires, develops, leases, and manages healthcare real estate. HCP was the first healthcare REIT selected to the S&P 500 and the only REIT included in the S&P 500 Dividend Aristocrats Index, as it has achieved 29 consecutive years of dividend increases. Despite HCP's impeccable history, the stock price has been suffering the past year, while most of the rest of the market has thrived.

Due to this price drop, income investors can capture a nice dividend payment with HCP, as it is currently yielding over 5%. So is the depressed price a cause for concern or an opportunity for income investors? Using our REIT dividend safety analysis, let's see if we can identify any red flags.

As already noted, HCP has an impressive dividend history, and quite possibly the best for an REIT. Its adjusted funds from operations (AFFO) payout ratio is below the 90% range that we look for in an REIT (FY14 AFFO=$2.42 Dividend=$2.10). The company has worked to improve this payout ratio over the past four years, as it was previously in the 90%+ range. Best of all, it successfully achieved this without sacrificing dividend growth, with an average increase of 6% over that time frame. The occupancy rate has increased slightly as well, displaying strong demand for its properties. Finally, the company appears to be conservatively financed, with a comfortable debt-to-total-capital of 45% and an investment grade bond rating of BBB+ with a "Stable" outlook.

Although HCP has come off of recent lows it experienced mid-March, the stock still appears to be a solid bargain at current valuation. Income investors looking for an above-average dividend yield with financial strength and safety backing up the dividend payment should look closer at HCP.

For anyone wanting to do further due diligence on HCP, we recommend Brad Thomas's recent article here.

Sources: Morningstar and HCP, Inc 10-K 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The 4% Portfolio Retirement Service currently has HCP on its "watch list".