The U.S. Federal Reserve is now walking a tightrope trying to strike a balance between ever-increasing inflation and sluggish economic growth. In March 2022, the U.S. consumer price index (CPI, a metric used to gauge inflation) rose year over year by 8.5%, the highest it has ever reached in the past 40 years.
Chicago Federal Reserve Bank President Charles Evans now believes that the Central Bank may have to hike interest rates above the neutral rate -- the interest rate at which the economy is neither stimulated nor restricted. However, several other Federal Open Market Committee members believe that the Federal Reserve will have to increase interest rates beyond the neutral rate, which can stifle economic growth.
This is a challenging time for growth stocks, which have been stock market darlings for several years now. Instead, retail investors will be better off by focusing on high-yield stocks, which offer some degree of protection against rising inflation. Retail investors will earn around $3,300 in dividend income over the next five years by investing $5,000 each in Medical Properties Trust (MPW 3.29%) and Sunoco LP (SUN 0.84%).
Here's why these two high-yield stocks could prove to be attractive picks in April 2022.
1. Medical Properties Trust
Medical Properties Trust is a real estate investment trust (REIT) that currently owns approximately 440 healthcare facilities -- including general acute care hospitals, behavioral health facilities, inpatient rehabilitation hospitals, long-term acute care hospitals, and urgent care facilities -- across nine countries globally. The company earns most of its revenue by leasing these properties on a long-term basis to healthcare operating companies. Medical Properties also earns a part of its revenue by offering collateralized real estate loans to these operators.
Medical Properties pays a handsome dividend yield of 5.75%. In fiscal 2021 (ended Dec. 31, 2021), the company's annual dividend per share of $1.12 was well covered by its free funds from operations (FFO) per share (a metric used to assess the profitability of a REIT) of $1.80.
As one of the largest private hospital owners in the world, Medical Properties could prove to be a very attractive defensive stock in the current inflationary environment since over 99% of its leases include annual rent escalations based on CPI. The majority of these lease agreements are also net leases, implying that tenants bear all ongoing operating and maintenance expenses associated with the facility.
The weighted average remaining term of leases was close to 17.8 years at the end of fiscal 2021, which will ensure significant revenue visibility in the coming years. Finally, unlike most other healthcare REITs that have chosen to focus on highly competitive areas such as senior-housing properties and medical office buildings, Medical Properties has opted to play in the less-competitive hospital space -- allowing for faster growth in asset base and improved financials.
In fiscal 2021, the U.S. market accounted for $1.0 billion or almost 65% of Medical Properties' total revenues. With a total asset portfolio worth over $20.5 billion, there is still significant potential for the company to expand organically or inorganically in $500 billion to $750 billion worth of operator-owned real estate space in the U.S.
Medical Properties' business is highly diversified across property types, types of operators, and geographies. Yet the company is currently trading at only 14.36 times adjusted funds from operations (AFFO), far lower than the sector median of 19.74 times AFFO.
Against the backdrop of a large addressable market opportunity, a solid business model, robust and safe dividend payouts, and a reasonable valuation, Medical Properties could prove to be a dependable pick in 2022.
2. Sunoco LP
The largest independent fuel distributor in the U.S., Sunoco LP, sold 7.5 billion gallons of fuel products in fiscal 2021 (ended Dec. 31, 2021), a year-over-year rise of 6.4%. This Master Limited Partnership (MLP) currently services around 7,300 dealers, fuel distributors, and commission agent customers, as well as around 2,500 commercial customers.
Sunoco has built a robust midstream infrastructure portfolio with terminals and storage facilities located strategically near its fuel distribution operations. This ensures optimal wholesale distribution operations. Thanks to its broad wholesale distribution network and brand power.
Sunoco currently offers a dividend yield of 7.69%. Although the company has not increased its dividend per share for the past five years, the payout ratio is at a reasonable 62.50%. The company reported a coverage ratio of 1.6 times for fiscal 2021, which is above the minimum targeted coverage ratio of 1.4 times. Sunoco's leverage ratio was 4.17 times at the end of fiscal 2021, quite close to its long-term target of 4.0 times. These metrics imply that the company's distributions are quite safe for the foreseeable future.
Despite uncertainty in global demand recovery, Sunoco has projected robust fuel volumes (7.7 to 8.1 billion gallons) and high fuel margins (10.5% to 11.5%) for fiscal 2022. The demand for traditional motor fuels will remain strong for several more years, even if we assume rapid adoption of electric vehicles across the world. According to Bloomberg New Energy Finance, in a high-growth scenario, electric vehicles will account for around 44% of the total vehicle fleet in the U.S. in 2040.
Although not a high-growth business, Sunoco is already a profitable company. With share prices currently up by only 5.07% so far this year, this may prove to be an attractive entry point for retail investors to bulk up on this safe high-yield stock in 2022.