Buying a high-yielding dividend stock is great because you get more bang for your buck. If you were to invest $25,000 in a stock that pays 1%, that would generate just $250 in annual cash flow for your portfolio. But if the yield were 5%, you'd be making $1,250 per year -- $1,000 more just by picking a higher yield.
A common concern for investors is that high-yielding dividend stocks may not be safe, and that they can't keep their payments going for a long time. But that isn't always the case. Two stocks that pay more than 5% that look to be safe income investments today are Medical Properties (MPW 0.65%) and AT&T (T 0.16%).
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1. Medical Properties
Medical Properties is a real estate investment trust (REIT), so it has to pay 90% of its earnings back to shareholders. That's a good thing for investors, because as long as the business is profitable, they know they'll be receiving a dividend payment.
With 431 properties throughout the world, this REIT provides some solid diversification within the healthcare industry. Just under three-quarters (74%) of its portfolio is made up of general acute care hospitals, and inpatient rehabilitation hospitals account for another 10%. And the need for hospital space isn't going to decline anytime soon, especially amid a pandemic, not to mention that potential long-term issues related to COVID-19 may remain unknown today.
Medical Properties reported its fourth-quarter results on Feb. 4. Its funds from operations (FFO) totaled $192.6 million for the period ending Dec. 31, up 19.1% year over year. For all of 2020, the REIT's FFO totaled $757.7 million, representing growth at an even higher rate of 41.4%.
FFO is the number to focus on here, because it is effectively net income for REITs. It excludes gains and losses and items not related to operations, so it can give you a much more realistic picture of the company's profitability and the sustainability of its dividend payments. Medical Properties' FFO per share was $1.43 for 2020 -- well above the $1.08 that it paid out in dividends per share over the previous four quarters. If you were to look strictly at the company's per-share profits of $0.81 (based on net income, which can include non-cash expenses like depreciation), you may think the dividend is unsustainable.
But not only are the dividend payments safe, Medical Properties recently increased them to $0.28 every quarter, up 4% from its previous payouts. With the dividend hike, investors who buy the stock can now expect to earn a yield of 5.1%, which is well above the S&P 500 average of 1.5%.
Medical Properties can be an excellent stock for healthcare investors looking for some stable, recurring income without having to worry about their payouts being too risky.
2. AT&T
AT&T currently pays investors an even higher dividend yield of 7%. It's an eye-popping amount, and one that likely has many investors doubting whether it can continue. AT&T isn't a REIT, so its dividend will depend on the company's overall strategy. And with this summer's international launch of its streaming service, HBO Max, there could soon be a growing need for cash to grow that area of the business.
In a recent interview with CNBC, AT&T CEO John Stankey dismissed any talk of a dividend cut and pointed to the organization's low payout ratio as to why it is safe. If it rises, he said, "I've got to ask that question" but notes that it isn't a worry today. And Stankey is right, the company is generating sufficient cash flow to keep things going. Here again, if investors were to solely rely on accounting income, they could get a very misleading picture of the business. In 2020, AT&T incurred a scary net loss of $5.2 billion. However, that also included a $15.5 billion writedown on its premium video business, DIRECTV (a move that doesn't impact cash).
That net loss would make AT&T's payout ratio negative. But that's not the case from a cash flow perspective. In 2020, AT&T generated $43.1 million from its day-to-day operating activities. After taking out capital expenditures of $15.7 billion, that still leaves approximately $27.5 billion in free cash -- plenty of room to cover its dividend payments, which totaled $15 billion during the year. That means AT&T is paying out about 55% of its free cash flow in the form of dividends. Even if the company were to invest more into its streaming business, it could still afford to do so and keep paying the dividend.
And if AT&T did decide to cut its dividend, given how high the payout is today, its yield could still remain above 5%. AT&T is one of the better-yielding Dividend Aristocrats (although it has been more than a year since its last rate hike). And with the company expecting HBO and HBO Max subscriptions to reach as high as 150 million subscribers by 2026 (it reported 61 million as of the end of 2020), it can also double as a great growth investment.
