Healthcare REITs: A Great Way To Play A Growing Sector

| About: Omega Healthcare (OHI)

There's little question that the healthcare industry is destined to grow over the coming decades, as demand from the aging baby boomer population grows. And while regulatory uncertainty has weighed down some companies, the industry remains largely in tact in the U.S.

Investors looking to side step this uncertainty, but still capitalize on the industry's upside potential, may want to consider healthcare REITs. These stocks have the added benefit of dividend income, which is even more preferable in today's low rate environment.

Healthcare REITs have not only consistently outperformed the S&P 500 since 2008, but they also offer dividend income on top of those capital gains. Currently, the sector has an average price-earnings ratio of 42.2x and an average dividend yield of 5.7%, according to TickerSpy.

A Look at Some Popular Healthcare REITs

There are many different healthcare REITs in the market.

Here are some of the best 3-month performers:

  1. Omega Healthcare Investors Inc. (NYSE:OHI) +25.7%
  2. Healthcare Realty Trust Inc. (NYSE:HR) +20.3%
  3. National Health Investors Inc. (NYSE:NHI) +17.1%
  4. LTC Properties Inc. (NYSE:LTC) +15.5%
  5. Health Care REIT Inc. (NYSE:HCN) +15.3%

Here are the best dividend yields in the sector:

  1. Cogdell Spencer Inc. (NYSE:CSA) 9.4%
  2. Medical Properties Trust Inc. (NYSE:MPW) 8.1%
  3. Omega Healthcare Investors Inc. 7.4%
  4. Senior Housing Properties Trust (NYSE:SNH) 6.6%
  5. Universal Health Realty Income Trust (NYSE:UHT) 6.1%

Omega Healthcare: The Preferred Play on the Sector

Omega Healthcare Investors Inc. , a healthcare REIT focused on long-term care facilities throughout the U.S., is perhaps the best-positioned company in the sector. With a beta co-efficient of less than 1.0, the stock has less volatility than the overall market, while it has risen some 13.59% since the beginning of this year.

A Look at the Fundamentals

From a fundamental standpoint, the company generates most of its revenues from skilled nursing facilities (SNFs) in the U.S. With the aging population, these facilities are not likely to disappear anytime soon in aggregate. And its own portfolio consists of high quality properties with strong operator coverage ratios relative to the industry.

Funds from operations (FFO) - one of the most useful indicators for REIT investors - jumped 4.7% to $44.5 million last quarter. Meanwhile, the company's quick ratio remains at a healthy 1.67x, which suggests that it could easily weather any modest downturn ahead from cuts to Medicare and Medicaid programs as a result of government budget cuts.

Some Risks and Justifications

The risks associated with this investment are two-fold. First, the aforementioned cuts to Medicare and Medicaid could hurt long-term care facilities (its clients) and depress lease and occupancy rates. And second, the sector has moved up sharply over the past few months and some investors believe it may be slightly overvalued.

That said, these companies offer strong dividend yields that can help offset a stagnant share price in the near-term, while maintaining long-term capital gains potential. And the low interest rate environment through 2014 should keep investors interested in these stocks for a long time to come. But investors looking for additional protection could use a covered call strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.