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Growth & Dividend Income from the Unhealthy

April 04, 2019

The US is aging and becoming increasingly unhealthy. While that’s not a good mix for the citizens of one of the leading economies on the planet, it continues to drive profitability for total return investors investing in healthcare stocks.

For proof, look at the performance of the S&P 500 Health Care Sector Index, which has risen 68.73% over the trailing five years alone.

             S&P 500 Health Care Sector Index Total Return

SourceBloomberg Finance, L.P.

In a recent study by the US Department of Commerce and the US Census, 78 million folks in the US will be 65 years of age or older by 2035. And by that same year, those at or under the age of 18 years will number 76 million.

This will be a significant change in the demographics of the nation—one that has traditionally been younger with more healthy and able folks to produce more for the economy.

What’s more, even the young people today are in trouble. The US Center for Disease Control recently observed that 36.5% of the US population is obese. That creates a breeding ground for chronic illnesses like heart disease and diabetes. And if you’re obese, slipping and falling is easier to do, resulting in increased injury risks, i.e., emergency room visits.

Add to the mix that last year, life expectancies for the US population stopped improving, with some segments dropping. As we know, the end of the line is where healthcare really ramps up to keep folks alive a bit longer.

No wonder healthcare spending is so big in the US and climbing quickly. According to the US Centers for Medicare and Medicaid Services (CMS), healthcare spending increased by 3.90% in 2017 to $3.9 trillion, or $10,739 per person. CMS predicts that spending between 2017 through 2026 will continue to rise by an average annual rate of 5.50%, reaching $5.7 trillion.

That means by 2026, healthcare spending will be around 20% of US GDP. That’s a huge number. It’s already nearly there.

While this certainly isn’t good news for the US population, it does provide opportunities for investors. It means that healthcare is going to be a strong and growing industry for many years to come. And that means finding companies that can grow with this trend will reward you well.

The One-Stop Play on Health

Inside the model portfolios of Profitable Investing, I have the overall market for healthcare represented by the Vanguard Health Care ETF (VHT).

 Vanguard Health Care ETF (VHT) Total Return

SourceBloomberg Finance, L.P.

The ETF has been a great performer, as you can see in the chart above. Year to date, the ETF has generated a return of 8.28%. And this follows a good history of profitability. Its trailing five-year return sits at 71.20%, for an average annual return equivalent of 11.35%.

It has a dividend that is currently yielding 2.56%, which is comfortably above the average for the S&P 500 Index. And the annual dividend distributions have been climbing on average by 20.94% during the past five years—so dividend investors should expect rising payouts moving forward.

The ETF has exposure throughout the healthcare market, with pharmaceuticals representing 39.2%, followed by healthcare products at 26.3% and health services at 13.9%. It also brings exposure to the growth engine of innovation—the biotechnology segment of the healthcare industry.

Biotechnology continues to bring blockbuster treatments with ample new revenue flows. The ETF has a collection of the leaders, and the sector has an overall weighting around 16.7% within the ETF.

With strong demand for healthcare now and for years to come, the Vanguard Health Care ETF provides great broad exposure for growth over time and dividends along the way.