We've all been there, looking at a stock's high dividend yield and envisioning it dumping money into our account for years and years. The allure of having some of life's financial pressures lessened is hard to deny. But free lunches are rare, and if you buy a dividend stock with a stratospheric yield, there's a good chance you'll be paying for it later, perhaps when it cuts its payout.
On that note, there are a pair of popular high-yield dividend stocks that are doubtlessly tempting many people right now. Neither is a good choice. Follow along and I'll discuss why.
1. Walgreens Boots Alliance
Walgreens Boots Alliance (WBA 0.57%) is a stock that probably won't fulfill your dividend-investing dreams. The pharmacy chain's forward yield is above 9%, and over the last 20 years its payment rose by more than 1,010%. Don't expect that pace of growth to continue, however.
Fundamentally, Walgreens is stuck between a rock and a hard place right now. Its traditional retail pharmacy business will probably never experience rapid growth again, as the market is nearly fully saturated. At the same time, its $34.5 billion in debt is a substantial financial constraint preventing it from fully committing to chasing growth in new markets, and interest payments will continue to come due.
It has nonetheless embarked on a mission to spin up primary healthcare offerings out of its pharmacies, which is a relatively new segment for the business. The burden of advancing into the segment has trashed its profitability. Walgreens now has less than one year's worth of operating costs in cash, right when it's unprofitable. Selling its liquid investments and its stakes in other businesses has become a routine move to generate enough cash to keep the lights on over the last year or so.
For the moment, there is probably enough leeway for the company to continue to pay its dividend. In 2022, its dividends only set it back $1.7 billion. But it's reasonable to expect the pace of its dividend increases to slow to a crawl. And if it runs out of assets to liquidate before it manages to get its new healthcare segment to be profitable, it might even need to slash investors' checks. There's no reason to take on such a risk when there are better options elsewhere.
2. Medical Properties Trust
Medical Properties Trust (MPW -1.10%) is a real estate investment trust (REIT) with a forward annual dividend yield of 19%. Getting a return that big each year would sound pretty good if not for the fact that the reason its yield is so high is that its shares are down by 53% so far this year. What's more, the factors precipitating the fall in its share price are only going to get worse from here on out.
Medical Properties Trust invests in hospital and clinical real estate, which it then rents out to its tenants, some of which it also invests in. To make all of those investments, it takes out debt. Then, ideally, it repays the debt slowly over time by collecting rents, or by selling its properties at a gain. Shareholders essentially get paid the difference between its revenue, which totaled $1.4 billion over the last 12 months, and the cost of its expenses and debt payments.
However, it would take quite a while to wait for debt to be fully paid off before making another investment, so it's typical for the company to take out additional debt and use some of the funds to pay off the existing debt load. And that is where problems arise.
In 2025, it'll have $1.4 billion in debt due for repayment, and in 2026, it'll need to cough up $2.7 billion. Astute readers will notice that the previously mentioned trailing-12-month rental revenue figure is the same size as the debt due in roughly the next 24 months. Even if Medical Properties Trust manages to convert 100% of its revenue into earnings -- an impossible feat for a REIT -- it'd come up short. It only has $340 million in cash.
There is no way for it to grow quickly enough to close the gap between its liabilities and liquid assets. On average, hospital companies are not about to massively expand their demand for physical space, as there is no catalyst or trend driving such a need. That means Medical Properties Trust will be liquidating its less-liquid assets to pay off its creditors.
In plainer terms, it's going to sell off the properties that are its cash cows because it can't afford to pay the debt service on its income streams. A handful of its holdings have already been sold over the last couple of years, but more sales and larger-scale sales will soon be necessary. And so it'll almost certainly let investors down if they're expecting the contrary, or even if they're expecting a continuation of the recent pace of decline.
