The Motley Fool: Take stock in real estate trust
Sun., March 6, 2016
If you’re in the market for dividend income, consider Ventas (NYSE: VTR). It’s a real estate investment trust (REIT) focused on health care, with close to 1,300 senior housing communities, medical office buildings, skilled nursing facilities, hospitals and other properties in the U.S., Canada and the U.K.
Ventas’ revenue has more than tripled since 2010, but its free cash flow has turned negative in the past few years, in large part due to aggressive acquisitions. These may put pressure on results in the near term, but they set Ventas up for further growth in the years ahead.
In 2015, Ventas posted 9 percent year-over-year growth in its funds from operations, with net operating income rising by 4 percent. Rising interest rates may depress Ventas and other REITs, too, but its debt load is very manageable.
The company’s long-term prospects remain bright as populations grow, age, and need more medical services. Ventas’ forward-looking price-to-earnings (P/E) ratio of 30 is well below its five-year average of 44. And with price-to-book-value, price-to-sales and price-to-cash-flow ratios also below the company’s five-year averages, Ventas is appealingly priced.
It offers shareholders a significant dividend, too, recently yielding a hefty 6 percent – and it has hiked its payout many times, with plenty of room for further growth. Consider buying now or waiting and hoping for an even better entry price.
Ask the Fool
Q: To find great stocks, am I right to seek ones with low P/E ratios and high dividend yields? – S.K., Danville, California
A: That’s a solid start, but look beyond those measures, too. After all, many great stocks pay little or no dividends – at least while they’re still young and growing rapidly. Facebook, Netflix and Amazon, for example, along with Warren Buffett’s Berkshire Hathaway, pay no dividend. Companies also sometimes have high yields and low price-to-earnings ratios only because their stock price has tumbled due to some major trouble.
Consider Avon Products, which has been struggling for many years now but recently sported a fat dividend yield of 6.3 percent. During the past five years, its shares fell from above $30 apiece to below $4. Its dividend has been slashed by 74 percent, too. Two years ago, Avon’s shares were near $20 apiece, with the same $0.24-per-year dividend payout it’s offering now. Thus, the yield then was roughly 1.2 percent ($0.24 divided by $20). But since the shares have plummeted, the yield is now far higher: $0.24 divided by $3.80 is 6.3 percent.
Never make a purchase decision based on very few numbers. The more you learn about a company, the sounder your decision should be.
Q: I’m a total novice investor. Where can I learn about impending initial public offerings (IPOs)? – R.Y., Muskegon, Michigan
A: New investors should avoid IPOs. They’re notoriously volatile and frequently don’t fare too well in their first year. It’s also usually only the rich or well-connected who get to buy shares at their low initial price. The rest of us are at a disadvantage, having to buy at later, higher prices.
My dumbest investment
One of my dumbest investments was my very first one. I work in academic biology and personally knew some of the people who struck it rich when Genentech went public in 1980. I wanted in on this bonanza, too, so I scraped together some money and bought some shares of Cetus shortly after it went public in 1981. The stock ended up in the toilet and stayed there for years, while I hung on.
At one point, the stock shot way up and I sold, making a profit. I was congratulating myself on this big win when I decided to calculate how much I would have made if I’d just kept the same amount of money in a CD. It turned out I would have made more with the CD. – D.M., San Francisco
The Fool responds: Cetus bet big on a single anti-cancer drug and ran out of money before being able to gain FDA approval. Cetus was bought by Chiron in 1991.
Interest rates were high at that time – in the mid-teens. That even tops the market’s long-term average growth rate. Plus, CD interest payments were much more of a sure thing than a stock’s performance.
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