Universal Health Realty (UHT -0.22%) has a very impressive dividend history and currently sports an attractive 6% dividend yield. Before you jump aboard, however, there's some good things and bad things to understand about this real estate investment trust (REIT). 

The good stuff first

Any company that manages to increase its dividend for 38 consecutive years is doing something right. You just can't build a record like that by accident and it shows a real commitment to returning value to shareholders, through dividend increases, in both good markets and bad ones. Universal Health Realty's incredible record of annual dividend increases is probably one of the most attractive characteristics of this REIT.

Two medical professionals performing surgery.

Image source: Getty Images.

Another thing to like about Universal Health Realty is its focus on medical properties. Generally speaking, medical care is a necessity, not an option, giving the property niche a sound underpinning. Moreover, with the baby boomer generation cresting into retirement, a period in which higher medical needs are fairly common, there is likely to be a boost in demand for the types of properties this REIT owns. On that score, Universal Health Realty has a heavy focus, around 70% of its portfolio, on medical office space located near or even on the grounds of hospitals. These are the types of properties that doctors like to be in and generally provide easy access for patients.

Meanwhile, the REIT's dividend was $0.715 per share in the fourth quarter of 2022 compared with funds from operations (FFO), which is essentially earnings for REITs, of $0.90 per share. That amounts to an FFO payout ratio of around 80%. That's not exactly low, but it still leaves room for adversity before a dividend cut would be in the cards. In fact, Universal Health Realty increased its dividend in November last year. And the dividend yield is currently at the high end of the stock's yield range over the past decade, so the shares appears historically cheap as well.

UHT Chart

UHT data by YCharts

So far, the story here looks fairly desirable. But there are some company-specific issues to consider that cloud the picture.

The bad news

The most pressing issue today for investors is probably the decline in Universal Health Realty's FFO. In the fourth quarter of 2021 the REIT's FFO came in at $0.93 per share and, as noted, was $0.90 in the final stanza of 2022. A $0.03-per-share decline isn't huge -- it's roughly a 3% drop -- but it highlights a bigger trend. For all of 2022, Universal Health Realty's FFO came in at $3.54 per share, down from $3.69 in 2021. That's just a 4% drop, but again, things are obviously moving in the wrong direction.

A part of the reason for that is that Universal Health Realty has been dealing with some property-level issues. Leases have ended without tenant renewal, leaving it with some vacant properties. That's going to be a drag on performance until it can either sell the assets or release them. Thus, it looks as if 2023 is unlikely to be a rebound year for FFO, which might actually get worse before it starts to get better. 

The REIT also entered into an asset swap with its largest tenant. While this is likely to turn out to be a net positive over time, it highlights an interesting fact about this landlord. Universal Health Realty is externally managed by Universal Health Services (UHS -0.36%) which is also its largest tenant. That sets up the kind of conflict-of-interest issues that tend to worry investors in the REIT sector. If you aren't comfortable with this arrangement, this healthcare REIT is definitely not for you.

The last factor that investors need to consider is that the most recent dividend increase was roughly 1.4%. That's a somewhat miserly increase, though it seems realistic given the FFO decline in 2022. But the average annualized increase over the past three years was 1.4%. Over five years it was 1.4%. And over the past decade the average increase was... you guessed it, 1.4%. That's not even enough to keep up with the historical rate of inflation growth. So the historically high yield may not be quite as attractive as it seems, since the dividend's buying power over time has declined. 

In all, this reliable dividend payer has some fairly material negatives that need to be considered along with the positives. In the end, it isn't shocking that investors would be downbeat on the stock today. In fact, a better question might be why investors were so upbeat a few years ago that the yield hit a low point in the 2% range.

Probably not worth it

Looking at the pros and cons of Universal Health Realty, even the 6% dividend yield on offer today seems a bit too low. Vacant properties, potential conflicts of interest given that its largest tenant is also its external manager, and minimal dividend growth over time just don't add up to a screaming buy. Perhaps if the yield were 10%, a level it has reached in the past, this REIT would be attractive. But right now, even with an impressive record of annual dividend increases, dividend investors can probably find more attractive alternatives.