Medical Properties Trust (MPW -1.10%) offers an incredible dividend yield of 12.6%. At that rate, you could collect $1,000 in dividends annually by investing less than $8,000. Sounds great, right?
However, the yield only looks that way because the business hasn't been doing all that well; shares of Medical Properties Trust are down 42% in just the past year. And before you consider buying the stock, you should ask yourself one thing.
Will the high dividend offset the stock's potential losses?
A high dividend yield sounds great, but if a business is struggling and it pays 12% while the share price falls by 20%, you're effectively in a worse position even with the dividend. Consider that over the past year, Medical Properties has declined 42%, meaning the total returns (including dividends) are still a net negative 36%. Over five years, the total returns are still a negative 9%.
Medical Properties Trust simply hasn't been a great investment over the years. While a real estate investment trust (REIT) can appear to be a relatively stable option for your portfolio, particularly if it's focused on healthcare properties, it's only as strong as its tenants. And that has been a problem for the REIT.
Why Medical Properties stock could sink lower
Medical Properties' most recent financials look like all is fine. After all, the company's normalized funds from operations (FFO) totaled $0.37 per share for the most recent period (which ended on March 31) and were higher than the $0.29 that it pays out in quarterly dividends.
But the danger is that there could be more challenging periods ahead. During the first quarter of 2023, the company wrote off $0.07 per share in expenses related to unbilled rent. And its unadjusted FFO per share of $0.31 was down 34% from the same period last year.
Plus, there are already red flags with multiple tenants, including Steward Health and Prospect Medical. The former had to extend a credit agreement last year, and in the case of the latter, the REIT admitted it has struggled to pay its full rent.
Not only could a deteriorating financial performance further spook investors, but there's also the chance that Medical Properties takes the drastic step of reducing its dividend. For a stock that has underperformed over the years, the dividend is likely the primary reason investors hold it right now. If that reason is gone, there could be a large sell-off to follow, leading to a further decline in its valuation.
Unless you're confident about the dividend, stay away
If Medical Properties' business proves to be more resilient than it appears to be to bearish investors, this could make for an attractive contrarian investment with tons of upside. But the company and its tenants are heading into some potentially perilous waters with a recession looming and worse economic conditions ahead. Things could get worse before they get better, and the REIT's dividend might not survive.
Dividend cuts normally do happen suddenly. There isn't always a predictable lead-up to when it might occur. In some cases, for growth-oriented businesses, dividend cuts can be positive catalysts since they free up financial resources to focus more on growth. But when it comes to REITs, where the primary appeal is the dividend, a cut could prove to be disastrous for the stock.
Medical Properties' dividend is high today, but it might not stay that high for long. And even if it does, if the stock continues to fall, you could end up just using that dividend income to offset losses from the investment. Even if you can tolerate the risk, you're probably better off just avoiding the healthcare stock entirely.
