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Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (9261)	6/15/2011 2:56:34 PM
From: chowder	1 Recommendation Read Replies (2) \| Respond to of 34328

Health Care REIT HCN ............. Harvest Focus \| Josh Peters, CFA, and Jason Ren Josh’s View I remain very cautious on real estate investment trusts overall; many are now trading at what I’d call ridiculously high prices. Health Care REIT, though, is not among them—and I’m pleased with the impact that recent transactions are likely to have on our dividend growth over the next few years. Morningstar’s Take We think health-care real estate has its fair share of tailwinds, and Health Care REIT has a history of earning attractive returns. Demand demographics are favorable, as baby boomers approach retirement age and life expectancy rises. Government also limits competitive supply in skilled nursing, benefiting key tenants. These forces help explain why Health Care REIT’s appetite for growth remains strong. Once planned-for 2011 acquisitions and developments are completed, the company will own about $13 billion in assets comprising 880 properties. Triple-net leases will constitute about four fifths of the company’s rents and should continue to afford Health Care REIT a baseline level of stability, since the structure entails that property-level expenses are passed on to tenants. Most of its triple-net leases also contain fixed or CPIbased rent escalators, so same-property rents should see small, steady gains. The Dividend: Is It Safe? Health Care REIT has a clean bill of financial health. The company has long preferred to fund more than half of its real estate acquisitions with equity, and few near-term debt maturities are on the docket. A conservative approach toward leverage, combined with the steady revenue of its portfolio of largely triple-net leases (tenants are responsible for taxes, insurance and maintenance), allowed Health Care REIT to be one of a handful of REITs to avoid cutting its dividend despite a fairly high payout ratio (89% of funds from operations in 2010). The firm’s finances are clearly geared toward both maximizing and preserving shareholder dividends, and the payout ratio for 2011 is likely to come down to around 85%, thanks to recent acquisitions. The Dividend: Will It Grow? Historically, Health Care REIT’s dividend growth has been modest, running at or slightly below the rate of inflation with a trailing 10-year average growth rate of 2.0%. However, we expect Health Care REIT’s dividend growth to accelerate over the next few years, primarily as the result of changes in the firm’s mix of property types, more acquisitions, and a larger book of development projects. With inflation-driven rent bumps providing a baseline for future growth, we expect funds from operations per share to rise at a 6%–7% clip over the next five years. However, we also think the firm will trim its payout ratio modestly in order to fund more of its growth with internally generated resources, which results in an outlook of 4%–5% average annual dividend increases. The Dividend: What’s the Return? While we like the stability and growth prospects for Health Care REIT’s dividend, a fair-size chunk of our $59 fair value estimate is based on our appraisal of development and acquisition activity. Since these projects are harder to appraise than a fully stabilized portfolio, our Dividend Buy price of $50 suggests a 15% discount to our fair value before buying. At $50, the stock would offer a current yield of 5.7%—well above the 3.6% median for our REIT coverage universe—while its 4%–5% yearly dividend growth potential points to average total returns running about 10%-11% per year.

To: RetiredNow who wrote (9261)	6/15/2011 3:18:08 PM
From: Kip S	Read Replies (2) \| Respond to of 34328

mindmeld, What your process calculates is the earnings yield, E divided by P. This is just the inverse of the P/E ratio. In your example, your stock has an earning yield of 12% and a P/E of 8.3. If it were paying the same dividend, but it represented 100% of earnings, its earnings yield would be 3% and its P/E 33. Lesson: Look for stocks meeting your dividend criteria with high earnings yield, which is the same as low P/Es. Realize you may know this already.