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2 Retirement Stocks to Buy for Passive Income

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The healthcare facilities and retirement-living industry is one of the best industries to invest in in 2019. It’s no secret the population in Canada has been aging significantly and will continue to age for the foreseeable future.

As baby boomers grow older, the demand for healthcare facilities and retirement communities is sure to increase. It’s estimated that there will be more than 10 million seniors in Canada by 2036.

While the industry isn’t fully defensive and could see a slight fall in revenues during a recession, it’s mostly recession proof and will fare better than a number of other industries that aren’t selling necessities such as health care and living communities.

Two top companies to give you exposure to the senior living sector are Extendicare (TSX:EXE) and Sienna Senior Living (TSX:SIA).


Extendicare is a multi-industry healthcare company primarily engaged in senior care. It has four main segments: its home healthcare company, its long-term care division, its retirement living segment, as well as its consulting services.

Paramed, Extendicare’s home healthcare company, did 39% of the company’s total revenue in 2018. In the last 12 months, it has delivered more than 11 million home healthcare hours.

Since Paramed is such a large portion of Extendicare’s business, it has been investing to improve its efficiency. The investment it’s been making in a new cloud-based system will give the company better technology, which is expected to improve margins.

The other main portion of Extendicare’s business is its long-term care division, which accounted for roughly 57% of revenue in 2018.

It has 58 long-term-care centres in total, and a number of those are being redeveloped alongside the Ontario government. It’s also implemented its new bedside clinical system in 50 of the 58 centres.

Extendicare has been growing its retirement living segment through new growth projects that are still coming online. Its Douglas Crossing expansion and Bolton Mills new build are still leasing out their new suites. In addition, the Barrieview community is expected to be finished in the fourth quarter.

The management & consulting services and group purchasing services divisions only account for 2% of revenue; however, they make up more than 10% of the company’s net operating income. The services segment continues to be a huge potential growth driver for Extendicare in the future.

Extendicare is poised to continue to grow along with the industry, as its many divisions give it diversification as well as exposure to many of the industry’s sub-sectors. Investors can get in today at a fairly cheap price and receive a dividend that currently yields roughly 5%.

Sienna Senior Living

Sienna is one of the industry leaders in Canada when it comes to senior residence operators. It has been in business for 47 years and owns 70 retirement residences and long-term-care residences in addition to the 17 that it manages for third-party companies.

Its retirement centres have an average occupancy rate of roughly 90%, whereas its long-term-care centres have an average occupancy rate above 98%.

Sienna continues to see growth come from both sides of its business; however, the growth in its retirement division has significantly outpaced the long-term-care division.

Since 2014, the net operating income from the retirement division is up 300% versus the long-term-care division’s, which is up 40%. The growth is being seen organically as well as through acquisitions.

The faster growth in its retirement division has helped the company’s overall net operating margin to grow from 22% in 2014 to 45% in the second quarter of 2019.

Financially, the company is in strong shape, its interest coverage ratio is more than four times, and in the second quarter, it had adjusted funds from operations (AFFO) per share of roughly $0.37.

That AFFO per share is significant, because Sienna only paid out a $0.23 per share dividend for the quarter, which gives it a payout ratio of roughly 62%. The dividend yields roughly 4.75% annually.

It’s a clear winner in the industry, and investors who have owned it have been rewarded handsomely. Since its IPO in 2010, the stock has a total return north of 240%, or 27.8% compounded annually.

Bottom line

As the population in Canada continues to age, it’s an easy shift in demographics that investors can take advantage of by buying healthcare stocks that are exposed to this new demand.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. Extendicare is a recommendation of Stock Advisor Canada.

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