I sold our final stock. The holding I had was in HCP, and I’ve been a big fan of this position for many years, but I realized it was time to reallocate for several reasons.
HCP is a Real Estate Investment Trust (REIT) focused on the healthcare industry. I really like this conceptually as looking forward I see a strong demand for the type of properties that they work with: senior housing, skilled nursing facilities, hospitals, medical offices etc.
Additionally, REITs in general are good income investments. In order to be granted special taxation status with the IRS they must promise to pay out at least 90% of taxable income as dividends annually. I personally like to shove these into retirement accounts and use a Dividend Reinvestment Program (DRIP) to automatically buy new shares (without a fee) with my dividend payment.
Within REITs, HCP is a a S&P 500 Dividend Aristocrat, a title bestowed on it for a 30 year performance of dividend increases. It currently yields 5.3% annually.
So…it sounds like a pretty good company and you may be wondering why I got out now? The truth is, it is still an attractive proposition in many ways. Frankly, I don’t have too many concerns about it for the future.
My view on investing
You need to consider an investment in a single company as incredibly high risk, and as you should know by now, risk must have reward priced into it in order to be a savvy investment decision. The reward of HCP is the yield – 5.3%… which is quite attractive. But the risk can be seen on the chart below:
HCP (in Blue) vs the S&P 500 (in Red)
As you can see, HCP is outperforming the S&P 500 until, well… it doesn’t anymore. At the beginning of February over a couple of days, it declines from a high of $47.97 to a low of $42.88. If you look at the macro-economic events for this period, nothing notably changed. This means that the decline that occurred was through unsystematic risk.
Essentially something happened to the company itself, a micro economic event. I looked around for ’news’ and I couldn’t find much to explain this drop. There was some muttering about the price being expensive compared to alternative companies, but nothing really solid.
The final push?
Typically, the events surrounding HCP would not be enough for me to bail on them. Note that this event happened a month ago, so it isn’t a knee jerk reaction to losing money.
Overexposure to real estate
As home owners we are already invested in the real estate market. While HCP may seem very different, there is correlation on a rate level. IE if rates rise borrowing will cost more which will impact marketability of our home, and the cost of borrowing for HCP increases, reducing profitability, also impacting its marketability.
While I do not predict immediate rate hikes, there is just not enough incentive for me to ‘hope’ it doesn’t happen. Remember risk must be offset with reward.
Conclusion
I do not believe in a one size fits all approach to investing. Holding individual stocks, including HCP can be a wise move for many investors. My own needs change based upon analysis of my overall asset allocation, including personal residence, and plans for business growth.
I do believe the core of any investment strategy should be a broad, well diversified asset allocation using low cost ETFs or Index Funds, sectors should account for economic cycle and personal exposure. Single stocks should be speculative in nature and considered very high risk. High risk is OK, providing that it is priced accordingly.
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