Professional gamblers will tell you that chasing losses can lead to financial ruin. Basically, chasing losses happens when someone tries to recoup losses quickly by making increasingly larger bets, assuming that "luck" must eventually change. The same theory applies to investing. Sometimes, investors continue to put money into the same stock as it falls, assuming it must eventually rebound. Many never do. Although still dicey, this strategy is better suited to the highest-quality companies, for example, Microsoft (MSFT 1.82%). Doing it with the real estate investment trust (REIT) Medical Properties Trust (MPW -1.10%) is perilous.
Medical Properties Trust is hugely popular with retail investors and heavily covered by analysts that cater to this crowd. Part of the allure is its high yield, currently almost 18%. But, as I have written in detail here, dividend growth is often much better for investors than high yields. Stocks often have high yields because they are lower quality or riskier. This causes the stock price to drop, and the market demands a yield much higher than average to own it. As shown below, Medical Properties Trust has lost 75% of investors' money since the beginning of 2022, even when the massive yield is included.
The problems with this REIT are many, including reliance on a few tenants, a major tenant with financial issues, and needing to sell off assets to service its debt. The dividend was cut nearly in half in August.
There are better dividend options. Here are two to consider.
1. Vici Properties
Some of the most famous properties in the world line the Las Vegas Strip, like Caesars Palace, MGM Grand, The Venetian, Mandalay Bay, and many more. Companies such as Caesars Entertainment (CZR -3.76%) and MGM Resorts (MGM -2.58%) don't own them. Instead, the real estate investment trust Vici Properties (VICI -0.28%) does. Vici also owns other famous properties, like Chelsea Piers in New York. It holds 92 properties in 26 states and one Canadian province.
One advantage to being the landlord is that revenue is consistent despite economic challenges. Vici collected 100% of rents while many casinos were closed during the pandemic of 2020. It even raised the dividend during this time. The dividend has been increased every year since the trust's inception in 2018 and yields more than 5% now. Its recent growth rate tops many in the industry, as shown below.
Source: Vici Properties
The lease agreements between Vici and its tenants are long, with an average of 42 years, so it doesn't have the same worries about occupancy that a typical office building or shopping center REIT might. Most leases are also tied to inflation; rents increase along with the consumer price index (CPI). This is critical for keeping up with rising prices and providing investors with an increasing dividend.
Unlike MPW, Vici isn't selling assets. It is buying more and expanding outside gaming to include golf resorts, bowling alleys, lodging, and international opportunities. The expansion adds to Vici's revenue and boosts its ability to continue its industry-leading dividend growth rate. Vici is an excellent option for dividend investors.
2. Booking Holdings
Perhaps you aren't a dividend investor, or you are but want to diversify a bit. Booking Holdings (BKNG 0.53%) deserves a look. Booking is highly profitable and produces tons of free cash flow (FCF) -- or cash flow after business investments and capital expenditures -- but it uses it differently than dividend stocks.
Booking is the world's largest online travel booking service and owns brands like Booking.com, Priceline, KAYAK, and OpenTable. It also competes with Airbnb (ABNB 0.75%) for short-term rental bookings. However, Booking focuses on rentals available through property managers rather than individual hosts.
Booking's revenue and free cash flow dipped during the pandemic due to the travel slowdown but rebounded to record levels, as shown below.
BKNG Revenue (TTM) data by YCharts
Booking can generate this huge 38% FCF margin because the business is very capital-light, meaning it doesn't spend much capital on property and equipment (capital expenditures, also known as capex). Capex doesn't appear on the income statement as an expense, but it reduces the cash available to issue dividends, invest in growth, or repurchase stock.
Through the third quarter of 2023, only $251 million, or 1.5% of revenue, was used for capex. This frees up money that the company is using to repurchase its stock. Many investors (including me!) prefer it when companies repurchase stock rather than pay a dividend because stock repurchases are not taxable income for shareholders. The repurchases reduce the number of shares available, increasing the value of the remaining shares outstanding. Booking has spent $14.5 billion since January 2022 on buybacks, which reduced the shares count by 13%.
Booking's stock trades at a price-to-earnings (P/E) ratio of 25. Historically, it's difficult to judge this since the ratios went wonky when the pandemic decimated earnings. However, it is lower than Expedia (EXPE -0.40%) and higher than Airbnb. I believe the valuation is fair given Booking's profitability, rising revenue, and exceptional free cash flow. Still, it is wise to use dollar-cost averaging, given the market's rise to near-record levels.
Medical Properties Trust hasn't been kind to investors, unfortunately. Before throwing good money after bad, consider alternatives like Vici Properties and Booking Holdings.
