HQH - 4 Reasons HQH Is Great For Retirement Portfolios

2023-05-10 03:28:34 ET

Summary

• You want exposure to the healthcare sector in your retirement portfolio.
• HQH fund has a 35-year track of outperforming and returning value to investors.
• It comes with an attractive discount not seen since March 2020.

Tekla Healthcare Investors ( HQH ) is a closed-ended equity mutual fund that specifically focuses on healthcare stocks. It invests in 152 healthcare stocks and supports a high yield of 9.4%. Below I will list 4 reasons why this fund is a great addition to your retirement portfolio.

Reason 1: The fund has a great track record of solid returns

This fund has been around since 1980s and it's been long only a great income play but also a great fund to grow one's overall wealth over time. Many times investors buy funds with ultra high yields just to find themselves trapped in a fund that constantly loses value and they end up losing more in principal than how much they collect in dividends. This fund is not one of those and its NAV has held up pretty well over the years. Since its inception, the fund had total return of 2440% which translates into an annualized rate of just north of 9%.

If you invested $10k into this fund 15 years ago and reinvested all dividends, you'd currently generate $3.3k per year in dividend income which is 33% yield on your original investment. This is why it's important to have this fund in your retirement account where you reinvest your dividends for many years while it keeps snowballing for decades. Another reason to have this stock in a dedicated retirement account is to make sure that you are not being taxed for those dividends you are reinvesting and getting your money's full worth.

Reason 2: Healthcare spend will keep growing for the foreseeable future

The population keeps getting older and healthcare spend will keep increasing as a result of this.

In addition to population getting older people seem to be getting sick at younger ages mostly driven by our sedentary lifestyles and unhealthy diets. According to one study people are now getting diagnosed with Type 2 diabetes as early as in their 20s. Just a few decades ago it was very rare to see this disease in people younger than 50 but now it's becoming very common. This is a chronic disease that needs to be managed for the rest of one's life so if someone gets diagnosed in their 20s, they will have to manage it for the next 40-50 years. According to another study , rates of heart disease for those under age of 40 has been rising rapidly in the last decade. According to newly updated guidelines, nearly half of adult population in America has hypertension which is another chronic disease that needs to be managed for the rest of one's life.

People are living longer and getting sick at earlier ages which means the need for healthcare is increasing at a tremendous rate. In the old days one would get a chronic disease at age 60 and pass away at age 70 but now people get diagnosed at age 40 and live well into their 80s which means the "management window" for many types of chronic diseases will be increasing from 10-15 years to 40+ years. While this is sad for the population, it's very bullish for healthcare sector.

Below is a quote from one study :

The number of people in the United States aged 50 years and older will increase by 61.11% from 137.25 million in 2020 to 221.13 million in 2050. Of the population 50 years and older, the number with at least one chronic disease is estimated to increase by 99.5% from 71.522 million in 2020 to 142.66 million by 2050. At the same time, those with multimorbidity are projected to increase 91.16% from 7.8304 million in 2020 to 14.968 million in 2050.

Reason 3: Drug companies have very healthy margins regardless of the status of the economy

Below graph shows trending of gross margins of some of the biggest holdings of HQH. These are the top 6 holdings of the fund and make up about 30% of its total weight. Notice that gross margins range from 74.45% to 88.04% for these 6 companies which I'd consider extremely healthy. High margins translate into high profitability and high profitability translates into higher return of capital to investors in shape of dividends and stock buybacks. Unless something shifts drastically in the healthcare sector, I don't see these margins changing much even during a recession. After all people don't stop taking medicine during a recession.

Also keep in mind that many of this fund's holdings have a history of paying and raising dividends and running large buyback programs.

Reason 4: The fund trades at a solid discount to its NAV

The fund currently trades at a -15.50% discount to its NAV which is the second biggest discount we've seen in the last decade. The biggest discount was in March 2020 during the COVID crash where stock market dropped 35% in a matter of weeks. This allows you to buy some of the best healthcare stocks at a deep discount and I don't think this discount will last for a long time considering the fund's long and successful history.

Conclusion

The population is getting older, living longer and becoming sick at younger ages which will increase the demand for healthcare for the foreseeable future. If you want to be exposed to healthcare sector in your retirement portfolio HQH provides you with a great opportunity especially at the current price level which reflects a 15% discount to its NAV. This is one of those funds you want to buy and hold for a very long time and keep collecting dividends for life and eventually pass onto your children. It has a 35-year track record of outperforming and delivering strong dividends while keeping its NAV intact (which is very rare for super high yielders).

I would buy this stock, reinvest all dividends and add on every dip and not sell unless something drastically changes in how the fund is run or we see some major shift in healthcare trends (which I don't expect to see in many of our lifetimes).

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