When it comes to investing in real estate investment trusts (REITs), it pays to have a long-term mindset. Getting a trickle of passive income from dividends is sweet, and even if you invest in a high-yielding stock like Medical Properties Trust (MPW -0.30%), you'll need to wait a while for your investment to pay itself off. And in the meantime, a lot can go wrong -- or right -- to change that payoff calculation significantly.
So is it worth locking up your cash in Medical Properties Trust or will it be better to look elsewhere for passive returns? Let's examine the case for both.
It could be right for the right kind of investor
In case the name didn't tip you off, Medical Properties Trust invests in hospital and clinical spaces, which it then rents out to healthcare companies. It also makes joint venture investments in some of its tenants, which often positions it to make profitable property sales in hot real estate markets for healthcare spaces, such as Massachusetts. As of the second quarter, 75.5% of its revenue was sourced from its leases to general hospitals.
Over the last 10 years, its trailing 12-month cash from operations rose by 810%, trouncing the growth of other popular healthcare REITs like Omega Healthcare Investors, which only increased by 228%. It's strongly profitable, and so it generates plenty of cash to return to shareholders. In fact, the main appeal of investing in the stock is that it'll be a relatively safe source of dividend income as there's little indication that society will ever need fewer of the medical facilities that it leases.
At the moment, Medical Properties Trust's forward dividend yield is above 7.7%, which is quite high. Plus, with 447 properties spread across 10 countries, it'll take quite a bit of economic disruption to impact a significant proportion of its business. So if you're looking for a company that'll cut you a beefy quarterly check that increases over time, it might be a good pick.
Don't buy this stock and expect rapid growth
Despite the numerous factors in its favor, Medical Properties Trust isn't a stock that you should expect to consistently beat the market, even in the long run. Its performance over the last three years has badly lagged the market, and shareholders lost more than 8.3% of their money. Of course, for those holding it for the sake of the dividend, that isn't so frightening, but it does point to other issues, like a generally slow pace of growth as a result of its debt-intensive business model.
In short, much like all REITs, without borrowing money, it's extremely hard for a company like Medical Properties Trust to gather enough capital to buy up new facilities and rent them out. At the moment, its total debt load is over $10.1 billion, 25% of which matures and will require repayment starting in 2026. With such a significant interest expense on the horizon, the company's slow growth rate can't be expected to make up for the anticipated costs.
So management needs to be conservative when it chooses to hike the dividend. Therefore, over the last five years, its dividend payment has only grown by 20.8% -- hardly enough of an increase to add up to significant gains without a (very) long-term hold.
Still, if the idea of slow growth or underperforming the market doesn't bother you, locking in some shares at the presently high dividend yield could be a smart move. Just be aware that the dividend isn't exactly rock solid; in August 2008, the company slashed its payout as a result of the financial crisis, so it might not be the ideal stock to buy in turbulent times, regardless of its resilient business.