My take on HCP’s Dividend Cut

HCP, Inc. (HCP) is a real estate investment trust that invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing.

HCP (HCP) spun-off Quality Care Properties (QCP) unit on October 31. Shareholders received a share of QCP for every five shares of HCP they owned. After the spin-off, the company announced its new dividend of 35 cents/share, which was a decrease from 35.70% from the prior dividend of 57.50 cents/share. This ended the 30 year streak of annual dividend increases for this dividend champion. Of course, we do not know whether QCP will be paying a dividend, and what their dividend rate is going to be. If the new dividend was decreased by 20%, I would have viewed it as a dividend freeze, which is fine as the level of income generating assets is decreasing by 20% due to the spin off. Since the dividend decrease was not proportional to the amount of shares that were spun-off, I view it as a dividend cut.

According to some investors, this dividend cut was to be expected, due to the issues surrounding HCP over the past two years. I personally got out of this REIT earlier this year, but that was probably due to luck, rather than my brilliance. I had initiated a small position in early 2015. If I owned HCP at the time of the dividend cut announcement, I would have sold right away.

Ever since I changed my mind on pass through entities in late 2015/early 2016, I have disposed of most of my REITs and MLP holdings. The individual investments that remained end up being very small positions, which would be expensive to sell. I did not abandon the REIT sector however – I ended up buying a REIT fund in a tax-advantaged account. That way, I gained instant diversification in over 160 REITs across multiple sectors, and I also do not have to lose out on taxes on my distributions. A large portion of REIT distribution income is taxed as ordinary income, which means I pay 25% Federal Tax on it. So reducing tax waste, and tax hassle, was worth it as well. In addition, while I have done really well with my REIT picks, such as Realty Income (O) or Digital Realty (DLR), I have also had some duds like Vereit (VER). So I have decided that it makes better sense to have the majority of my REITs in a fund, rather than hope that my individual picks are good. Unfortunately, I am no Brad Thomas.

Full Disclosure: Long O, DLR, VER

Relevant Articles:

- Five Things to Look For in a Real Estate Investment Trust
- Avoid Dividend Cutters at All Costs
- A Change of heart on REITs and MLPs
- When to sell my dividend stocks?
- Are we in a REIT bubble?