As the unpredictable bear market grinds on, I wouldn’t blame you for being frustrated. But I would blame you for fleeing the stock market. I don’t want you to miss the great investment opportunities that are still out there.

That’s why in this Stocks to Watch article, I spotlight a stock that confers income as well as growth. This dual-sector investment pays a safe and high dividend and it’s also poised for robust capital appreciation. In this risky and highly volatile market, you’d be hard pressed to find a more appealing total return package.

The graying of America…

If you’re looking for a health care play that’s also a way to profit from real estate, consider Ventas (NYSE: VTR), a real estate investment trust (REIT) focused on the exploding market for senior care. The stock rarely gets media attention, which is good news for you. The investment herd hasn’t bid up its shares.

A major tailwind for Ventas is the inexorable aging of the world population, which boosts demand for its specialized senior care facilities. In this dangerous investment climate, REITs are a superb diversification tool. What’s more, the huge growth of health care spending around the world is a megatrend that’s recession-resistant (see chart).

REITs put the investor in the position of being a de facto commercial landlord, without any of the burdens involved with actually leasing property. The fact is, most wealth in the United States derives from real estate, which is why this asset belongs in your portfolio. Ventas leverages not only the real estate industry but health care’s growing prosperity as well.

REITs are an often-misunderstood investment class, so you should first know the basics of how they work.

An equity REIT’s primary goal is maximizing net rental income from owning and operating commercial real estate. Essentially, the REIT operates as the landlord. REITs own industrial parks, office buildings, apartment complexes, shopping centers, shopping malls, hotels, and self-storage facilities. REITs are easy to buy and sell, and they’re easy to own. They employ large staffs to take care of the daily hassles of property ownership, which never becomes your concern.

REITs don’t pay federal income tax. To earn its categorization as a REIT, the real estate company agrees to pay out at least 90% of net accounting income in the form of a shareholder dividend. Only by doing this can a real estate company obtain the coveted label of “REIT” and consequently avoid being taxed at the corporate level. That’s why REITs are among the highest-paying dividend stocks around. But you must pick the right REIT.

REITs aren’t totally immune to the effects of inflation, since they can be negatively affected by rising interest rates. If a REIT borrows heavily to finance acquisitions, for instance, it will find its cost of financing rise along with rates.

However, less leveraged REITs and those that operate in other countries won’t be as heavily impacted as interest rates drift higher. They also have the ownership advantage of raising rents when the economy heats up, increasing cash flows along with the pace of inflation.

Historically, property prices also have kept track with inflation, generating capital appreciation in addition to growing cash flows.

Persistent demand for senior care…

One of the best REITs to own today is Ventas, which boasts proven management and a solid balance sheet. With a market cap of $14.8 billion, Ventas invests in hospitals, skilled nursing facilities, senior housing, medical office buildings, and other health care facilities.

Based in Chicago, Ventas operates 1,200 properties in the U.S., Canada, and United Kingdom. The current dividend yield is a robust 4.72%.

Ventas’ management has been turning in solid funds from operations (FFO) growth through a series of property acquisitions. FFO is the figure used by REITs to define the cash flow from their operations; healthy and growing FFO indicates a safe and supportable dividend.

In its most recent operating results, Ventas reported second-quarter FFO of $0.72, in-line with expectations. VTR racked up revenues of $1.02 billion in Q2, a year-over-year increase of 11.3%.

The average analyst expectation is for Ventas’ year-over-year earnings growth in the next quarter to reach 110%. The Wall Street consensus calls for the stock’s price to reach $56.25 per share in 12 months, which (as of this writing) would hand investors a gain of more than 51%.

Editor’s Note: If you’re investing for income, your focus should always be on the health of the underlying business. The best dividend stocks are the ones that are in good shape and growing, so they can maintain and raise their payouts. For our special report on safe, high-income stocks, click here.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com.

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