There's more than one way to set up a big passive income stream but none of them are as easy as buying dividend stocks. The payments they distribute accumulate quarter after quarter whether you pay attention to the underlying business or not.
History's shown that you don't even need to be particularly good at picking dividend stocks to realize a healthy return. You just need to be patient. During the five-decade stretch between 1973 and 2022, dividend growers in the benchmark S&P 500 index delivered a 10.24% average annual return, according to research from Ned Davis and Hartford Funds.
This pair of dividend stocks stand out from the rest with a high yield up front and underlying businesses that can continue meeting their commitments for the foreseeable future. Splitting an investment of around $45,000 between the two could lead to $4,000 in annual dividend payments. Here's why these stocks look like smart buys for individual investors with any amount of capital who want an income-generating portfolio.
Physicians Realty Trust: 6.4% yield
As its name implies, Physicians Realty Trust (DOC +0.00%) is a real estate investment trust (REIT) that owns a lot of medical office buildings. REIT stocks appeal to dividend investors because they can avoid paying corporate income tax by distributing nearly all of their profits to investors.
NYSE: DOC
Key Data Points
As an owner of medical office buildings, Physicians Realty Trust can take advantage of two powerful trends. First, longer lifespans mean U.S. spending on healthcare is rising fast. The national health expenditure increased by nearly $1 trillion during the five years that ended in 2020 to reach $4.1 trillion. This figure's expected to reach $6.8 trillion in 2030.
The time when doctors owned their own practices is nearing an end. In 2022, around 74% of U.S. physicians were employed by a hospital or corporate entity, and this figure has risen sharply from 62% in 2019. Those corporate entities tend to rent their buildings from a REIT like this one.
This REIT's dividend hasn't budged since 2017, but it could see some upward movement in the foreseeable future. Funds from operations (FFO), a proxy for earnings used to evaluate REITs, came in at $1.25 per share over the past year. That's more than enough to meet a dividend obligation currently set at just $0.92 per share annually.
To receive $2,000 in annual dividend income from Physicians Realty Trust, you would need to spend about $31,250 on 2,174 shares of the stock.
Medical Properties Trust: 14.1% yield
Medical Properties Trust (MPW +3.80%) is another medical building REIT, but this one focuses on hospitals and related acute-care facilities. Instead of managing its facilities, this REIT works with 55 different hospital operators that typically sign long-term net leases.
NYSE: MPW
Key Data Points
The net leases that Medical Properties Trust employs transfer all the variable costs of owning a building, such as taxes and maintenance, to its operators. With annual rent escalators built in, investors can rely on steadily rising cash flows as long as all its tenants can pay their rent.
The stock offers an enormous 14.1% yield right now because the COVID-19 pandemic was a huge challenge that some of its hospital operators couldn't handle. In February, the company told investors to expect normalized FFO to fall from $1.82 last year to $1.50 this year if one of its larger operators, Prospect Medical, can't make rent payments. Even in its worst-case scenario, Medical Properties Trust expects more than enough FFO to meet a dividend obligation currently set at $1.16 per share.
Assuming Medical Properties Trust doesn't need to slash its payout, you'll need to spend around $14,100 on shares of this REIT to receive $2,000 in annual dividend payments. I think the company can transition troubled properties to new tenants before it needs to slash its payout, but this is a long way from guaranteed. Investors should only take a chance on this stock if it's going to become a relatively small part of a diverse portfolio.
