When income-seeking investors like us go shopping for stocks to buy we almost always need to make a difficult choice. We can select stocks that offer high yields up front, but there's a problem with such a simple strategy. Stocks generally don't offer high dividend yields unless the market believes they're going to have trouble raising their payouts.
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These two dividend payers offer eye-popping yields even though they've done a fine job raising their payouts in recent years. The market expects them to stumble, but there are reasons to suspect they can continue making and raising their payouts in the years ahead.
Medical Properties Trust: A 12.5% yield
Medical Properties Trust (MPW +0.40%) is a real estate investment trust (REIT) specializing in hospitals and other acute care facilities. At the end of March, it owned 444 hospitals spread throughout 31 states in the U.S. and nine other countries.
Medical Properties Trust has hospital operators sign long-term net leases that transfer all variable costs of owning its hospitals to the tenant. With annual rent escalators written into its leases, this REIT typically enjoys steadily rising cash flows.
NYSE: MPW
Key Data Points
Since 2013, Medical Properties Trust has raised its dividend payout nine times for a total gain of 45%. Unlike most medical REITs, it raised its payout in 2020, 2021, and 2022, despite the havoc created by the COVID-19 pandemic.
The stock offers a super high dividend yield right now because investors are worried it won't be able to keep up with payments. In the first quarter, Medical Properties Trust recorded no revenue from Prospect Medical Holdings, its third largest tenant.
Prospect received new financing in May that has Medical Properties Trust expecting partial rent payments in September and full payments next March. Right now you can buy this stock for just 6.2 times the low end of management's guided range for normalized funds from operations, or FFO, this year. At this low price, long-term investors could realize market-beating gains even if profits stagnate.
Hitting its estimate this year should be a breeze for this REIT. The low end assumes no revenue from Prospect this year, but we already know that new financing is expected to result in partial payments this September.
Enbridge: A 7.1% yield
If you want to diversify your portfolio with an energy stock but you aren't sure which one to choose, consider Enbridge (ENB 1.36%). It's a midstream owner and operator of oil and gas pipelines that Canadian energy producers rely on to deliver raw products to U.S. refineries.
NYSE: ENB
Key Data Points
Enbridge's dividend program is hard to beat. It's been 28 years since the company went more than a year without raising its payout at least once, and those raises have been significant. The dividend has grown by 10% annually since 1995.
Minor fluctuations in supply or demand can send oil and gas prices skyrocketing or plummeting. Pipeline company cash flows are a lot more reliable than energy producer cash flows because it's the volume of products flowing through their pipes that determine revenue.
Most pipeline companies are structured as master limited partnerships, which can make tax season extra complicated. Enbridge stands apart from its peers by offering investors qualified dividends, which are taxed as long-term capital gains. The capital gains tax rate was 15% for Americans filing solo who earned between $41,676 and $459,750 last year.
Enbridge shareholders can likely look forward to significant dividend payout raises over the next several years. For 2023, the company expects distributable cash flow to land between $5.25 and $5.65 per share. An annualized dividend payout currently set at just $3.55 per share gives management plenty of room for future raises.
