Not all stocks that pay high dividends are too good to be true. In fact, some stocks with high yields have lots of room to grow, or they trade for very attractive valuations. We asked three of our Fool.com contributors to discuss some of their favorite dividend stocks that yield over 5%, and here's why they suggest taking a closer look at Medical Properties Trust (MPW +2.17%), AT&T (T 0.39%), and Iron Mountain (IRM +0.63%)
A high yield with room to grow
Matt Frankel, CFP (Medical Properties Trust): Medical Properties Trust is a real estate investment trust, or REIT, that specializes in healthcare properties, specifically hospitals. About three-fourths of the portfolio is made of general acute-care hospitals, with inpatient rehabilitation hospitals making up most of the rest.
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Healthcare real estate is a great long-term investment for a few reasons. For one thing, demand for healthcare facilities is expected to soar over the next few decades. The older segments of the U.S. population are growing rapidly, with the 65-and-older group expected to roughly double by 2050. This should result in steadily increasing demand.
In addition, there's tremendous opportunity to grow within the existing market. Unlike many other types of commercial real estate like hotels and malls, most healthcare properties aren't REIT-owned. Only about 15% of the current $1.1-trillion market is owned by REITs, with a large portion of properties owned by health systems and physicians. When a REIT like Medical Properties Trust acquires a property from a health system, it's generally a win-win situation for both parties, so we could be in the early innings of a wave of healthcare REIT growth.
Finally, Medical Properties Trust's portfolio is full of net-leased properties. This means that tenants sign long-term leases and are responsible for expenses such as property taxes, insurance, and maintenance -- all Medical Properties Trust has to do is acquire a property and enjoy year after year of predictable, growing income.
Medical Properties Trust currently yields about 5.3%, and the payout represents just 73% of last year's funds from operations -- a rather low payout ratio for a REIT. The bottom line is that Medical Properties Trust has a high, safe dividend and lots of room to grow over the coming years.
Still cheap, still sporting a big yield
Keith Noonan (AT&T): With low earnings multiples, a fantastic dividend profile, and underappreciated growth potential, AT&T stock has a trifecta of appealing characteristics for income investors. It's no secret that the company's sales and earnings performance have been sluggish, and that trend is reflected in shares having lost nearly 40% of their value over the last three years. However, the stock offers substantial upside at current prices, and it stands out as an investment that could play a foundation-level role in a market-beating portfolio.
Shares sport a 6.5% yield and trade at just 9 times the year's expected earnings. Investors can also look forward to the yield on their AT&T stock steadily climbing each year. The telecommunications giant has increased its payout annually for 34 years running, and even with recent pressures, the business is generating enough free cash flow to cover the dividend and leave the door safely open for more payout hikes.
Competition has meant that its mobile wireless segment isn't powering growth, and the company's DirecTV television business is losing subscribers, but investors are still getting a cash machine of a business at a great price. AT&T has America's second-largest mobile wireless subscription base and the largest pay-TV base. And while exposure to the television market amid ongoing cord-cutting trends will likely continue to weigh on that business, AT&T still has avenues to long-term growth. The integration of Time Warner following last year's big acquisition gives the company strength in entertainment content and distribution, and technology trends like 5G and the Internet of Things should create a wide range of new service opportunities over the next decade.
In addition to the huge yield and all-around top-notch dividend component, the company's growth potential continues to be underappreciated -- and the stock continues to present appealing value.
A mountain of opportunity
Chris Neiger (Iron Mountain): You might not be familiar with Iron Mountain, but this document storage company should be on income investors' radar for several reasons. First, the company pays a hefty 6.8% yield. That's generous to be sure, and the company's dominant position in the document storage and shredding business -- 95% of Fortune 1,000 companies use its services -- means Iron Mountain's business isn't going anywhere anytime soon.
Aside from its high yield and large market share, Iron Mountain is wisely diversifying its revenue streams by adding new services like data storage. The company has built out its data storage capacity over the years and now ranks in the top 10 of data storage companies worldwide. Iron Mountain's management said on the company's recent earnings call that its "growth opportunities" segment (which is made up mainly of its data storage business) now accounts for 25% of total revenue, and it expects that to reach 30% in 2020.
If all that isn't good enough for income investors, they should also consider that Iron Mountain's business is structured as a REIT, which means that in return for receiving a special tax status, the company has to pay 90% or more of its income as dividends. Which, of course, is excellent news for income investors.
With its dominant position in file storage and its growing opportunities from data storage, Iron Mountain -- and its impressive 6.8% yield -- should be on income investors' lists of potential dividend investments.
