As a dividend investor, would you rather invest in a company that buys and rents out hospital space, or a company that buys and operates green energy resources? For those wondering whether to buy shares of Medical Properties Trust (MPW -5.54%) or NextEra Energy Partners (NEP 1.19%), read on, and you'll see one of them trumps the other as far as income investing is concerned.
Both businesses aim to offer reliable long-term payouts to shareholders, and both require major amounts of borrowing to get the capital necessary to purchase productive assets. But don't assume they're investments of equal provenance. Let's analyze each so that you'll appreciate which one is the clear winner and the better dividend stock.
The case for Medical Properties Trust
Medical Properties Trust is a real estate investment trust (REIT) for healthcare space, which gives it a few advantages as a dividend stock.
People are always going to need healthcare, and for most of us, that healthcare is going to be delivered in person at specialized facilities, which are heavily regulated and expensive to build and operate. Therefore, hospital operating businesses will probably always have a need to work with a company like MPT, as renting floor space is much cheaper than building a new structure. Likewise, companies that own clinical real estate but need capital to hire more staff will always benefit from having the option of selling their property to the REIT and signing a lease for their space immediately after.
So MPT's role in the healthcare ecosystem is unlikely to change much over time. It can collect rents on the properties it owns for many years without needing to spend much of anything, and its forward dividend yield near 9.6% will pay investors all the while. Of course, management is always adding to its base of managed assets, which totaled $21.1 billion as of third-quarter 2022, spread across 434 properties. In the last 12 months, rent from those facilities led its net income to top $1.2 billion, an increase of 300% compared to five years prior.
To sweeten the pot even more, as a landlord, it builds annual rent escalations into its leases. That means investors don't need to worry too much about inflation chewing away at the dividend, as the top line is likely to keep increasing even if the company doesn't buy and rent out any new properties. That's also how it could afford raising its dividend by 45% over the last 10 years.
The case for NextEra Energy Partners
Whereas MPT is a landlord, NextEra Energy Partners is an operator of renewable energy generation assets. Its portfolio of natural gas power plants, solar panel fields, and wind turbine farms brought in $1.2 billion in 2022, with a net income of $477 million. As a result, it'll have the major advantage of seeing demand for its electricity rise in the coming years as more and more energy production is mandated to be from clean sources.
In 2022, it gained partial ownership of green generation and energy storage assets with production capacity of around 1,200 megawatts, bringing its total portfolio size to 12,663 megawatts of gross capacity. Further acquisitions are all but guaranteed, and its access to up to $2.5 billion in capital by borrowing from its revolving credit facility means it won't be short on money to make purchases and grow the top line.
NEP's dividend presently yields above 4.4%, and over the last three years, management hiked the dividend by 46.4%. That's a bit faster than the dividend increase of 26.7% you'd get by holding an index fund over the same period, and it also blows Medical Properties Trust's dividend growth of only 7.4% out of the water. Furthermore, leaders are confident that it'll have enough traction in the energy market to continue increasing the dividend by up to 15% annually for at least the next three years, and likely even longer than that.
It's not a close contest
NextEra Energy Partners is a significantly better bet for dividend investors than Medical Properties Trust, despite its lower dividend yield.
MPT is significantly more indebted than NEP, with a debt-to-equity ratio above 107 compared to the green energy company's ratio of 35.8. That means NextEra will have a much easier time borrowing money at an attractive interest rate, so in the long run, it will pay a lot less to service its debt, leaving more capital for revenue-growing acquisitions.
Of equal importance is the fact that there's an ongoing global transition away from fossil fuels toward green energy sources, and NextEra is already reaping the profits despite even more demand for its services being practically guaranteed. Medical Properties Trust can't look forward to any kind of deluge of demand, as additional hospital space won't be needed at anything approaching the same intensity in the coming years. Finally, the healthcare landlord could have its tenants default on paying rent, which is a significant risk that NEP simply doesn't have.
So don't get fooled by Medical Properties' high dividend yield, as it's the least critical factor in determining which company is the better investment.
