A high-yielding dividend stock that pays more than 7% might sound too risky to consider. Many stocks normally pay less than 5%, and even the S&P 500 averages a yield of only 1.5%.
However, with markets struggling this year, many stocks have fallen significantly in value. And when a company's share price goes down, as long as there have been no changes to its dividend, its yield goes up. As a result, many dividend stocks are paying higher yields than they were a year ago.
One healthcare stock that stands out for its high payout today is Medical Properties Trust (MPW 1.44%). The real estate investment trust (REIT) pays 7.7%, and its share price is down 36% (far worse than the S&P 500's decline of 15% over the same period).
Is this a dividend stock that looks attractive at a reduced price, or is there a risk here that should keep investors away? Let's take a look.
NYSE: MPW
Key Data Points
What the REIT's recent earnings numbers say
Medical Properties has a diverse portfolio that includes 447 facilities spread across 10 countries (in the U.S., it has a presence in 32 states). In total, they are worth an estimated $22.3 billion and include acute care hospitals, rehabilitation hospitals, and behavioral health facilities.
On Aug. 3, the REIT released its second-quarter earnings numbers. Revenue of $400.2 million for the period ended June 30 rose 4.8% year over year. Net income of $190.1 million increased by 66% due to a gain on the sale of real estate. When looking at funds from operations, or FFO, which exclude gains and losses, it totaled $274.9 million and was still up an impressive 34% from the prior-year period. On a per-share basis, FFO was $0.46.
The key number to take away from all that is the last one: FFO per share. That is what REIT investors focus on to help gauge the strength of the dividend. Medical Properties pays a quarterly dividend of $0.29, which would put its payout ratio at 63% of FFO. That leaves a good margin of safety for the business. It could even justify a rate increase; management has raised the dividend by 45% from the $0.20 it was paying in 2013 -- that's how far back its current streak of annual dividend increases goes.
The guidance also looks strong
Looking ahead, Medical Properties anticipates that for 2022, its FFO per share will fall within a range of $1.78 and $1.82. Even at the lower end of that forecast, its payout ratio would be 65% of FFO, which assumes that the dividend remains intact.
There are unforeseen risks that can come up during this time that lead to smaller profits than the company expects. This is why having a strong buffer between the dividend and the expected FFO can be incredibly valuable to investors. As a result, investors can feel confident that the dividend is safe.
So why is the stock down?
Despite the company's strong fundamentals, investors have been bearish on the stock as rising interest rates make loans more costly for the business. That could hurt the company's ability to acquire more properties for its portfolio in order to help generate growth. And the REIT has more than $10 billion in debt on its books already, putting its debt-to-equity ratio at 1.1, which is high given where it has been in the past:
MPW debt-to-equity ratio, Data by YCharts.
However, Medical Properties is still delivering strong results even with higher interest rates. And some analysts believe that next year, there could even be interest rate cuts. This could be an example of investors paying too much attention to short-term market conditions rather than the big picture, which is that Medical Properties' business remains sound.
Should you invest in Medical Properties stock?
Medical Properties offers a yield that isn't too good to be true. And with its significant decline in value this year, it trades at less than 8 times its earnings, which is incredibly cheap compared to the 20 times earnings the average healthcare stock trades at today. Between its low valuation and high yield, this is one of the better dividend stocks you can buy right now.
