Stocks have been under a lot of pressure this year, weighed down by rising interest rates to combat inflation. If there's a silver lining to the sell-off, dividend yields move inversely to stock prices. Because of that, many dividend yields are much higher right now.
Two dividend stocks with big-time yields are EPR Properties (EPR -0.03%) and Medical Properties Trust (MPW -8.68%). That's largely due to the sell-off in their stock prices this year. Here's why income-focused investors won't want to miss that opportunity.
The financial flexibility to execute its strategy
Shares of EPR Properties have tumbled more than 20% from their most recent high. That pushed the real estate investment trust's (REIT) dividend yield up to 7.7%. It's more than double the REIT sector's average and several times the 1.6% dividend yield on an S&P 500 index fund.
While rising interest rates have played a role because they make it more expensive for REITs to borrow money, that's not the only factor weighing on EPR Properties' stock price. The other issue is that one of the experiential real estate-focused REIT's largest tenants, Cineworld Group (the parent company of Regal Cinemas), filed for bankruptcy due to its large debt load and the continued effect of the pandemic on cinema attendance. That has investors concerned Regal might not pay rent.
However, EPR Properties tends to own the industry's most profitable locations. While it held 3% of the theaters in North America, these locations captured 8% of the box office. Because of that, Regal will likely continue paying rent or risk losing a profitable location to another operator.
Even if Cineworld stops paying rent, EPR Properties has plenty of cushion to maintain its big-time dividend. The company expects to generate $150 million of excess cash after paying its dividend this year. Meanwhile, it has a solid investment-grade balance sheet with lots of liquidity ($168 million of cash and an undrawn $1 billion credit facility) and no debt maturing until 2024.
That gives it the financial flexibility to continue expanding its experiential real estate portfolio as it strives to diversify away from theaters. It made nearly $240 million of investments during the first half of the year and planned to invest $500 million to $700 million on acquiring experiential real estate this year. Those deals should grow its rental income and reduce its exposure to the theater sector, helping further improve the long-term sustainability of its big-time dividend.
Getting a healthy dose of liquidity to continue making deals
Medical Properties Trust's stock price has plunged over 40% from its peak earlier this year. That has pushed the healthcare REIT's dividend yield up over 8%.
A big weight on the company has been the effect of rising interest rates on its ability to access capital to finance new acquisitions. That's evident in the REIT's revised acquisition outlook. CFO Steve Hamner noted on the REIT's second-quarter conference call that "We previously predicted that our 2022 acquisitions volume will be in the $1 billion to $3 billion range."
However, Hamner noted, "given the rapid and dramatic development in the capital markets and the global economic environment, even since our last earnings call, acquisitions will... very likely be on the low end of that range." That's a big difference for a REIT that has acquired over $3 billion of real estate in each of the last couple of years.
With debt and equity capital more expensive, Medical Properties has turned to capital recycling to give it the funds to make acquisitions. The REIT recently unveiled a series of deals that will free up $600 million of liquidity it can use to bolster its balance sheet and make accretive acquisitions. Those future deals should help grow its funds from operations, enabling Medical Properties Trust to continue increasing its dividend, which it has done for the last eight straight years.
Investors are also overlooking the positive effect inflation has on the company's rental income. Medical Properties Trust's leases have embedded rate escalation clauses, many of which link to the inflation rate. Because of that, the company expects its rental income to rise by $57 million, or 4.4%, next year. That embedded rent growth can help support a higher dividend.
Don't miss this opportunity
Shares of EPR Properties and Medical Properties Trust have tumbled this year. Because of that, their dividend yields have spiked to eye-catching levels. Those payouts look safe, given the liquidity both companies have to pay dividends and execute their strategic plans. That makes them look like attractive buys right now that income-focused investors might regret not taking advantage of in the future.
