How to Get Your Piece of This $3.5-Trillion Windfall
August 26, 2019
The Best Healthcare Stocks for 2019—and Beyond
If you want to earn more investment income over the next 10 years, then you need to pay attention to healthcare stocks.
Each month, 300,000 baby boomers turn 65, enough to fill the city of St. Louis, Missouri. This demographic shift will put a big strain on our healthcare system. And as this generation ages, these folks will need more prescriptions, more check-ups, and more medical tests. (Source: “Baby Boomers Retire,” The Pew Reseach Center, December 29, 2010.)
This problem, however, presents a big opportunity for investors. In 2017, Americans spent $3.5 trillion on healthcare services, or $10,739 per person. Such a large, secular trend has created growing streams of stock dividends from the companies on the front line of this boom. (Source: “National Health Expenditure Data,” Centers for Medicare & Medicaid Services, December 11, 2018.)
If you look at some of the best stocks we’ve featured at Income Investors, you can see that these trends often result in outstanding capital gains.
Chipmaker Texas Instruments Incorporated (NYSE:TXN) has cashed in on the Internet of Things; pipeline giant TC Energy Corporation (NYSE:TRP) has emerged as a linchpin in America’s shale revolution; and data-storage trust CoreSite Realty Corp (NYSE:COR) has been selling “picks and shovels” to the Internet gold rush.
Moreover, these stocks can pay outsized, growing distributions because they cater to expanding markets.
These markets, however, pale in comparison to the opportunity in healthcare. Analysts project that the sector will grow at a six percent compounded annual clip over the next decade, or three times as fast as the overall economy. By 2027, healthcare will account for almost $0.20 out of every dollar spent in the country. (Source: “National Health Expenditure Projections 2018-2027,” Centers for Medicare & Medicaid Services, last accessed August 26, 2019.)
So at this point you might be thinking, “How can I cash in?”
Frankly, you can almost throw darts at a list of healthcare stocks and make money. The Health Care SPDR (NYSE:XLV) exchange-traded fund (ETF ) has delivered a total return, including dividends, of 268% over the past decade.
That performance crushed the gains from the broader S&P 500 with much less risk. Many individual companies in the healthcare sector posted even better gains.
That said, you can find a wide spectrum of quality in this industry. And for dividend hunters, some healthcare stocks offer better income streams than others. Let’s dive into three of my favorites.
Why I’m Banking on This 4% Yield
Welltower Inc (NYSE:WELL) allows investors to collect regular rental income without the hassle of dealing with tenants. Over the past few decades, the real estate investment trust (REIT) has built a sprawling empire of healthcare properties: retirement communities, office buildings, walk-in clinics, senior living centers, etc.
Thanks to an aging population, these spaces have stayed in high demand.
What separates Welltower from other REITs is the location of these properties. Much of the partnership’s portfolio is focused in dense, urban areas. In other words, locations where it’s difficult to build competing properties. This allows Welltower executives to raises rents year after year with little fear of rivals swiping tenants.
For Welltower unitholders, this has created a great stream of dividend income. Since 2009, management has boosted the distribution on eight occasions. Today, WELL units have a quarterly payout of $0.87 apiece, which comes out to an annual yield of more than four percent. (Source: “Dividend History,” Welltower Inc, last accessed August 26, 2019.)
New Device Could Solve the Opioid Crisis
You can see the signs of America’s opioid crisis almost everywhere across the country, from overstretched emergency rooms to addicts shooting up in the streets. The U.S. Centers for Disease Control estimates that 68,500 people died from drug overdoses nationwide last year. For comparison, that figure is larger than the number of American soldiers who died in the Vietnam War. (Source: “US drug overdose deaths fell slightly in 2018,” CNN, last accessed July 17, 2019.)
Medical device maker Medtronic PLC (NYSE:MDT) could have a solution: spinal-cord stimulators. These devices, which doctors surgically insert near the patient’s lower back, send an electrical current to mask pain.
Analysts believe the market for this technology could grow 10-fold over the next decade as doctors and patients look for alternatives to opioids. (Source: “Spinal-cord stimulators mean big business for device makers,” The Associated Press, November 25, 2018.)
In the meantime, Medtronic earns robust profits from its other business segments. The company’s core has long stood as the dominant player in heart pacemakers worldwide. Management pads the bottom line further through a variety of products, from insulin pumps and surgical devices to diabetes care and X-ray imaging systems.
Wall Street has taken notice. Several top hedge fund managers, including D.E. Shaw, Cliff Asness, and Jim Simons, have accumulated positions in this stock. (Source: “Medtronic Plc (MDT) – Hedge Fund Holdings,” Insider Monkey, last accessed August 26, 2019.)
Over the past decade, Medtronic has delivered a total return of 246%. And this could just be the beginning.
One Top Healthcare Stock For the Next 10 Years
In business, it pays to bet on the biggest, meanest companies. But sometimes you stumble upon an exception in the world of small-caps.
Case in point: Atrion Corporation (NASDAQ:ATRI). The $1.4-billion medical device maker has carved out a lucrative niche supplying cardiovascular, ophthalmic, and fluid-delivery products.
These markets aren’t big enough opportunities for the bigger players in the industry. That leaves Atrion with a collection of quiet near-monopolies that pump out robust profits year after year.
To be fair, Atrion doesn’t provide the biggest income stream around. At 0.8%, the yield on this stock won’t knock your socks off. But management has gotten into the habit of boosting the payout on a regular basis. And over the past decade, they’ve increased the distribution at a 14.3% compounded annual clip. (Source: “Atrion Corporation (ATRI),” Yahoo! Finance, last accessed August 26, 2019.)
Given enough time, this dividend trickle could become a raging river of income.
