Prediction: These Could Be the Best-Performing Healthcare Dividend Stocks Through 2030

Key Points

• Welltower and Ventas are two of the largest healthcare real estate investment trusts that focus on senior housing assets.

• Senior housing was at the center of the storm when COVID-19 hit, leading both Welltower and Ventas to cut their dividends.

• With the world trying to move past COVID-19, long-term demographic trends are again boosting Welltower and Ventas.

• 10 stocks we like better than Welltower ›

There are times when unexpected global events have an outsized impact on a company's business. That was true across a broad spectrum of stocks after the coronavirus pandemic began. But at the center of that storm were senior-housing property owners like Welltower (NYSE: WELL) and Ventas (NYSE: VTR).

Now that much of the storm has passed, I think these two real estate investment trusts (REITs) are going to be among the best-performing dividend stocks in the healthcare sector through at least the end of the decade. Here's why.

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COVID-19: The shock that nobody wanted

The turn of the decade saw a massive healthcare shock in the form of the coronavirus pandemic. It was an illness that spread easily in group settings and was particularly deadly for older adults. That's about the worst possible outcome that you might think of for the senior housing properties that Welltower and Ventas own. It's little wonder that these healthcare REITs hunkered down, cutting their dividends, and focused on helping their tenants survive.

Image source: Getty Images.

It was an ugly period for their businesses, with elevated levels of move-outs (an industry euphemism that usually means resident deaths), low move-ins, and occupancy levels falling. Some of the tenants that Welltower and Ventas worked with didn't make it through, requiring the REITs to find new tenants or, in several cases, simply taking over operating the properties themselves.

When a healthcare REIT owns and operates an asset, it's known as a SHOP ("senior housing operating portfolio") asset in the industry. In practice, the REIT hires a management company to run the property, but the financial results of that property flow through to the REIT's top and bottom lines. In good years, this boosts results; in bad years, it hampers overall results. That's dramatically different from collecting rent, which provides a steady income stream year in and year out.

The goal during much of the pandemic was simple: muddle through. Both Welltower and Ventas did that. And now things are looking up for these two healthcare-focused property owners.

Welltower and Ventas have the wind at their backs

Now that the world has found ways to live with COVID-19, business is back to normal. And for the senior housing segment of the REIT sector, that means growth. The number of people 80 and older is set to shift from a 1.4% growth rate to a 5% growth rate, with the inflection point taking place in 2026. That more rapid growth is projected to last at least through 2033.

The best part of the story, however, is that construction of new senior housing units is at historically low levels. So an increase in demand is set to meet with tight supply, which will likely lead to attractive growth for Welltower and Ventas. Indeed, given the dynamics taking shape, occupancy levels are likely to go up even as rent rates rise.

There's a second level of growth to consider thanks to the growth of SHOP assets in Welltower's and Ventas' portfolios. Because the performance of SHOP assets flows directly through to these REITs' income statements, improving industry performance will likely supercharge their financial results.

Already good and likely to get better

To be fair, this information isn't some kind of secret. Wall Street is well aware of the positives here, with the share prices of both Welltower and Ventas up materially since their pandemic lows. However, there's yet another key fact for these REITs: They have both returned to dividend growth. As their dividends rise along with their improved financial performance, investors are likely to keep rewarding the shares with higher prices.

The caveat here is that Ventas and Welltower are no longer income investments, which they were in the years prior to COVID. They are now dividend growth stocks, which are a different kind of beast. Notably, Ventas' dividend yield is just 2.8% while Welltower's is only 1.8%. But if you're looking for dividend growth stocks, you might want to look into these two REITs. They could be among the best-performing healthcare dividend stocks through 2030, and perhaps beyond.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.