3 safe dividend stocks that will grow as the population ages

Take advantage of demographic changes to safely secure growing income streams.

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As you can see from the chart below, Australia is undergoing a major shift in age demographics. As I concluded after this examination of the statistics, “baby boomers can expect to live to their mid-eighties, and perhaps longer if healthcare continues to improve.” Put simply, the percentage of the population over the age of 70 is on the rise, making our revered elders a key source of revenues and profits.

My grandmother will tell you that healthcare and medical costs are her main expense, and one she won’t to try avoid. Not only does healthcare give her longer to enjoy life on this planet, but it minimises those health niggles that occasionally cause her some discomfort.

It’s clear that the healthcare industry will thrive as the house-owning superannuated baby boomers increase their healthcare spend, and for that reason my first way to play the ageing population is Primary Health Care Limited (ASX: PRY). Primary Healthcare owns general medical, pathology and diagnostic imaging practices throughout Australia.

The recent half-yearly result reported improved revenue and profit, although operating cashflow was down, partly because the company paid more tax than in the prior corresponding period. I’ve long considered shares fairly expensive, but they have come down recently (BT Management has been selling) and I note that founding board member and Managing Director, Edmund Bateman, has topped up his holding at above the current price of $4.70. I expect the company to yield about 4.2% for FY 2014, and I think it’s a great option for dividend-hungry long-term investors.

Another dividend-paying stock with exposure to the ageing population is Australian Pharmaceutical Industries Limited (ASX: API). One of the concerns I have about this company is the debt: I find it particularly tiresome that the AGM presentation makes no mention of it, despite the fact that the company is relatively highly geared, with a debt/equity ratio of 24%. Having said that, Washington H Soul Pattinson Limited (ASX: SOL) is a major shareholder, so the company would probably have recourse to more equity if need be.

Pleasingly for shareholders, the company’s Priceline Pharmacies continue to grow sales and add value to the brand. Of particular value is the chain’s “Sister Club” which, to quote the Managing Director, “remains unrivalled in the health and beauty sector.” I expect the company to yield about 5.4% for 2014, and the dividend will continue to grow if the Priceline brand continues to be so successful.

My third safe stock to profit from the ageing population is CSL Limited (ASX: CSL). CSL is the largest supplier of blood plasma products in the world. To my mind, the distribution network in place is a formidable competitive advantage that should allow CSL to continue to achieve impressive return on investment for years to come. Presently, the high price of the stock means that investors should be cautious: those that are interested should consider buying in thirds.

While the stock is only expected to yield about 1.6% for FY 2014 the company is also buying back shares. This means that earnings per share will grow faster than earnings. The buy-backs will pay off handsomely if CSL is able to continue to grow profits for many years to come, as I expect they will. The continual release of new products will drive profit growth by leveraging the existing distribution network, in my opinion. The company grew its dividend by about 200% in the last decade (with ups and downs along the way). I’d expect dividend growth of about half that over the next decade and would need CSL’s stock price to fall by around 10% before I considered a purchase.

Foolish takeaway

While CSL is a bit too expensive, Primary Health looks reasonably attractive at current levels. That’s because the current dividend yield will provide significant income to investors as they wait patiently for capital gains. Over the next 20 years, demographic changes are sure to drive up revenues for companies such as Primary Health Care, Australian Pharmaceutical Industries and CSL. All investors should have a healthcare stock in their portfolio. Having said that, there are plenty of other ways to play the ageing population.

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Motley Fool contributor Claude Walker (@claudedwalker) loves his grandmothers and does not own shares in any of the companies mentioned in this article.

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