When it comes to passive income, not all that glitters is gold. The temptation of a high dividend yield promises investors strong returns, but the reality is often that lower-yielding stocks can pay out far more sustainably.
With that in mind, let's examine two popular passive-income stocks. One can support your portfolio's value for years to come, and the other is more likely to leave you in the lurch than on the path to riches.
The gift that keeps on giving to investors
The healthcare giant Abbott Laboratories (ABT -0.65%) is forever a river of opportunity for passive income investors thanks to its stability and consistent growth over time. Its business model is to make and sell products like glucose monitors, surgical stents, generic drugs, and diagnostic tests around the globe.
And with $43.1 billion in revenue in 2021, business is booming; its trailing-12-month net income grew by 114% over the last three years, and more is on the way. In fact, this year, management had to issue an update to its earnings guidance because it was making even more money than anticipated.
Because Abbott's sales mix is so diversified, shareholders don't need to face nearly as much risk as they might with a focused operator competing in one of the company's segments. If, for example, a competitor like DexCom one-upped Abbott's glucose monitors by developing a better version of the technology, it wouldn't affect Abbott's base of revenue by that much as glucose monitors are merely one sub-segment within its medical devices division that brought in $3.6 billion in the third quarter alone. And since many of its products are crucial for hospitals and healthcare systems, the chances of multiple segments collapsing simultaneously are close to nil.
In terms of its passive income potential, given its forward dividend yield of around 1.8%, it would only take roughly $5,376 in Abbott stock to earn you $100 per year. That might not seem like much, because it isn't, at least not right away.
But that payout will almost certainly rise over time as the company hikes the dividend. For reference, over the last 10 years, its dividend rose by 264%. And since the company has a history of annual hikes that goes back more than 50 years, making it a Dividend King, you can have a good deal of confidence in future growth.
Avoid debt-driven business models
In contrast to Abbott Laboratories, Medical Properties Trust (MPW -1.51%) is a real estate investment trust (REIT) that invests in floor space for use by hospitals and clinics. Then, it collects rent or debt payments for years and years.
At the moment, it operates around 435 properties, which in total gave it more than $1.5 billion in revenue last year against its total adjusted gross assets of roughly $21.1 billion.
The REIT's forward dividend yield is above 9.8%, making it a high-yielder that's bound to tempt investors. But there's a reason its yield is so high, and it's also why it might be better to avoid this stock for now.
When Medical Properties Trust wants to expand, it needs to buy or invest in a new facility, then it needs to find a tenant that will reliably pay it back. Ideally, those property purchases would be made in cash, but the company only has a little over $299.1 million on hand, which isn't a huge amount given how expensive medical facilities can be.
So that means it needs to use debt to finance its expansion, and it already has a hefty debt load of nearly $9.5 billion. The implication is that it'll have a harder time finding loans with favorable terms than a business with less leverage.
What's more, because of the Federal Reserve's intent to control inflation by increasing the cost of borrowing money, Medical Properties is going to face more-restrictive borrowing conditions and higher interest rates -- at least, for the near term. That'll be exacerbated by the fact that it's already burdened by debt. And for whichever tenants it finds after an acquisition, they'll need to be willing to pay more for the privilege of renting to ensure that the REIT can still make a decent return.
These issues are unlikely to cause it to go bankrupt, and they're also unlikely to threaten its dividend in the short term. But given that the dividend has increased by only 45% in the last 10 years, there isn't much reason to buy it over Abbott Labs, and the borrowing headwinds it will continue to face make it a stock to avoid altogether for now.
