Most investors think they have to give up high-yielding dividends for long-term growth opportunities. But as you'll see with these three under-the-radar stocks -- that simply isn't true.
EPR Properties (EPR -0.10%), Rithm Capital (RITM -0.09%), and Medical Properties Trust (MPW -0.22%) are all paying dividend yields of 5% or more and have long-term growth opportunities. Here's a closer look at the stocks three Motley Fool contributors believe are great income stocks to hold for the long haul.
EPR Dividend Yield data by YCharts
Let the fun begin
Liz Brumer-Smith (EPR Properties): It's no surprise that share prices for EPR Properties, the premier entertainment real estate investment trust (REIT), which owns just over 350 different entertainment properties across the country, have been absolutely crushed. COVID-19 temporarily shuttered most entertainment venues.
Movie theaters, gaming and dining destinations, concert venues, ski lodges and resorts, museums, and countless other cultural, arts, and entertainment properties battled closure mandates and decreased demand for over two years. But thankfully, demand for experiential activities is back in a big way.
The company's earnings for the past few quarters have been outstanding. Its adjusted funds from operations (AFFO), a key financial metric for REITs, grew by 94% year over year as of the second quarter of 2022.
But EPR Properties isn't totally in the clear. One of its top-10 tenants, Cineworld Group, the parent company of Regal Cinemas, is preparing to file for bankruptcy, which has caused some volatility in its stock price lately. However, EPR Properties has more than enough cash on hand to help it sustain a blow like this. Not to mention its low ratio of debt to earnings before taxes, interest, amortization, and depreciation (EBITDA) of around 5.1 times and a payout ratio of 67% means the company should have no problem maintaining its high-yielding dividend return -- which is paid monthly.
COVID-19's impact on the entertainment industry was temporary. Long-term, I still believe people will want to participate in experiential activities, making EPR Properties a fantastic long-term buy given its high dividend yield of 6.7% today.
A mortgage REIT with low interest rate risk
Mike Price (Rithm Capital): New Residential recently rebranded itself as Rithm Capital as part of a transition to internalize its management team and no longer be externally managed by Fortress Investment Group. Management expects this move to save the mortgage REIT (mREIT) around $60 million per year. For mREITs, any little bit of operating expense reduction helps.
Mortgage REITs borrow money and invest in mortgages or mortgage-backed securities (MBS). Typically, the mREIT has a strong balance sheet that allows it to borrow at a low rate and earn the spread on the difference between that low rate and the mortgage rate.
It's a nice business model that churns out plenty of cash flow to pay super high dividends in the good times. For example, Rithm's dividend yield is currently over 10%. The problem is when interest rates rise.
Most mREITs major in long-term investments -- they have to because residential mortgages often have 30-year terms and basically all of them have at least 15-year terms. But their financing sources are short-term. That means when rates go up, they have to refinance at a higher rate while their cash flow stays the same. The spread gets thinner. This logic led to basically the entire sector having a down year.
Rithm isn't as vulnerable to interest rate risk as its competitors. First, it has $1.6 billion in cash to make new investments or pay off debt if it needs to. Second, a recent acquisition gave its portfolio exposure to a portfolio of short-term "bridge" loans with an average rate of 7.8%. Finally, the REIT has a significant investment in mortgage servicing rights (MSRs), which increase in value when interest rates rise.
Rithm services the mortgage that it owns MSRs for, which means it collects payments, runs escrow accounts to pay property taxes and insurance, and interfaces with borrowers when necessary. The lender that holds the mortgages pays it a fee to do this. When interest rates go up, fewer borrowers refinance out of their mortgage, which would make the right to service their loan worthless.
Rithm Capital has the same high double-digit dividend yield as many of its competitors, but it may be uniquely able to fight off higher interest rates -- meaning you won't have to worry about that dividend getting hammered over the next few years.
Specialty medical facilities with a massive dividend yield
Kristi Waterworth (Medical Properties Trust): When shopping for dividend-paying stocks, a lot of investors prefer to go with companies they either have heard of or whose business they can at least relate to. That's why things like apartment REITs are so popular: People understand how the apartment business works. But that doesn't mean that there's no room for equally stable, but less well-known REITs like Medical Properties Trust.
Medical Properties Trust specializes in leasing properties like hospitals and other specialty healthcare facilities. Those properties have a very specific clientele that do very specific work and need the right facilities for their purposes. You can't simply take something like an old supermarket and make it a healthcare facility without a large amount of work, and that's where this REIT comes in.
Its tenants know and appreciate that they are getting industry-specific facilities. That's clear from the growth that Medical Properties Trust has experienced in the last decade. Free cash flow has grown a whopping 670.74% since 2012, going from $105.3 million to $811.7 million in 2021. This, of course, is largely due to strategic growth across the globe. As of June 30, Medical Properties Trust caters to 54 operators across 447 properties in 10 countries.
These profits and stable tenants have made it possible for Medical Properties Trust to pay out a healthy dividend of 7.71% with a payout ratio of 57%. Despite the huge dividend, the payout ratio is low enough that it can be reasonably assumed to be sustainable and that the company is using its funds to invest in increased expansion.
Medical Properties Trust's yearly dividends have increased from $0.62 per share in 2005 to $1.12 per share in 2021. That's an 80.65% increase over the last 16 years, and it's been a fairly steady one.
My one and only concern about this stock is the debt load it's carrying. Currently, it holds a total debt load of $10.2 billion that's due in the next 10 years, but only $19.7 billion in assets. While this isn't so high as to be burdensome, if debts become much higher, it could start to affect dividend payouts if rental rates were to decrease. However, considering the huge dividend payout that Medical Properties Trust is issuing, a small reduction in dividends would still make for an incredible dividend return.
