Healthy dividends from 3 health care stocks

These picks fit the bill in a sector with great long-term prospects.

By InvestorPlace Jan 27, 2012 10:21AM
Don Farrall/Photodisc/Getty ImagesBy Jeff Reeves

Heath care stocks are the no-brainer demographic trend that every investor should take advantage of.

Aging baby boomers will demand more services, prescriptions and medical care. Health care is recession-proof, since people rarely cut back on their quality of life even if money is stretched thin. The big-picture reasons go on and on.

Perhaps the most compelling case for investors can be seen in the recent performance of health care funds. The Vanguard Health Care ETF (VHT) and the iShares Dow Jones US Healthcare ETF (IYH), for instance, have both doubled the returns of the Dow Jones industrials in the past year -- with roughly 12% gains over the benchmark index's 6% rise. They also blow away the measly 2% tallied by the S&P 500 in the past 12 months.

The only downside for buy-and-hold investors is the distributions, or dividends, paid by these ETFs. While 1.4% for the iShares health care ETF and 1.6% for the Vanguard health care ETF aren't terrible, those yields are hardly attractive when you consider many picks in the sector boast dividends well over 3% and sometimes even topping 4%.

Also, health care could always take a hit in 2012 and beyond. The sector isn't immune to broader economic troubles, even if it is relatively insulated. Specific challenges also confront many health care subsectors -- patent expirations for Big Pharma stocks like Eli Lilly (LLY), Pfizer (PFE) and Merck (MRK) being the most obvious.

But if you do your research, you can find a number of health care picks that seem to be great long-term investments. Here are three. Not only are they relatively low-risk, but each pays a plump dividend with a yield of more than 4%.

1. HCP (HCP) is a real-estate investment trust (REIT). I know what you're thinking: What does real estate have to do with health care? Well, HCP invests primarily in senior housing, medical office buildings and hospitals. That means it's well positioned not just in terms of growth in the health care business but also because it will be a powerful dividend payer.

That's because REITs deliver 90% of their taxable income back to shareholders according to federal law. They do this via big dividends -- currently a yield of 4.6% in HCP's case.

This is a sleepy play that certainly won't deliver massive growth. REITs aren't set up that way. But if you're looking for a solid dividend payer that will ride the rising tide in health care, consider HCP. The stock is up 13% in the last 12 months, double the Dow Jones Industrials. It's also up 40% since January 2010, vs. just 25% for the benchmark index.

2. Meridian Bioscience (VIVO), a provider of diagnostic test kits, is in the business of screening for diseases to help treat them or prevent breakouts. The rhetoric about growing health care costs and how "an ounce of prevention is worth a pound of cure" seems to align perfectly with Meridian's business model, making it a good candidate for a long-term buy.

The company is admittedly a bit riskier than larger picks in the sector, of course. It has a market cap of only about $800 million. Also, VIVO shares flopped big-time during the volatility of last summer, and they remain off about 33%. The company has run into short-term headwinds, too, having missed its earnings targets for the quarter just recently.

However, Meridian's quarterly revenue was up 8% year-over-year in its most recent earnings report, and full-year revenue for fiscal 2011 was up almost 12%. Yes, profits were flat, but the company has zero long-term debt and remains soundly profitable.

With a 4% dividend and safe operations like that, you may want to consider a long-term play in Meridian to see what else this company has coming down the pipeline in the next few years.

3. Lincare Holdings (LNCR) is a leading provider of in-home care, which includes oxygen tanks and other respiratory gear. Lincare serves about 750,000 customers nationwide.

Thanks to the demographics fueling in-home care -- many more patients to serve and a system that prefers to keep those patients at home for treatment -- Lincare has posted seven straight quarters of year-over-year revenue growth. Its earnings have risen by about 45% from fiscal 2009 through its just-completed 2011 fiscal year. Despite this growth, it's priced at a reasonable P/E of around 11 right now.

The possibility of Medicare reimbursement changing and some general competitive challenges are concerns that could hold Lincare back. In fact, Deutsche Bank just downgraded the stock to hold in January in advance of Lincare's Feb. 6 earnings announcement.

However, the home-care business seems the perfect growth opportunity as baby boomers age, and the nice 3.1% dividend will tide you over while you watch and wait.

Of course, if you're into "alternative" medicine, find out why at least one doctor is saying magic mushrooms may hold the key to treating depression.

Jeff Reeves is the editor of Write him at editor@investorplace​​.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

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