If you're looking at stocks with dividend yields in excess of 10%, you know there's going to be some risk. However, there's also the possibility the markets haven't adjusted and aren't correctly pricing a stock that may currently be less risky than it once was. It can sometimes take a while for investors to warm up to a struggling dividend stock, especially if it has burned them in the past.
Medical Properties Trust (MPW -1.10%) certainly falls into that category. It recently cut its dividend and the stock has been a dreadful investment, losing half of its value in 2023. But could this stock be undervalued, and potentially be the best deal out there for income investors today?
Medical Properties Trust's yield remains high despite a steep cut
Real estate investment trust (REIT) Medical Properties Trust's portfolio centers around hospitals, which in normal years should provide investors with a good deal of stability. But the past few years have been anything but typical for the healthcare industry and the REIT's tenants haven't been performing terribly well.
As a result, MPT had to cut its quarterly dividend in 2023 from $0.29 to just $0.15. The REIT felt it was the right move in order to strengthen its balance sheet and help free up cash to pay down debt, which totals more than $10 billion.
The dividend cut, however, resulted in a steep sell-off in MPT's value, as the struggling stock fell even further. As a result, even with the reduced payout, the REIT is still yielding a fairly high percentage at just over 12%. Investors simply aren't convinced that the company's struggles, which have involved problematic tenants not paying full rent in the past, are behind MPT.
The company's new dividend doesn't appear to be in danger
During the first three quarters of 2023, MPT has reported funds from operations (FFO) per share of $1.24. And for the full year, it expects FFO to be between $1.58 and $1.60 -- more than double the REIT's current annual dividend rate of $0.60.FFO is a key metric REITs rely on to evaluate the safety of their dividend payments and investors often use it in place of net income as it excludes deprecation as well as gains and losses. With a high FFO relative to its dividend, MPT's earnings could get cut in half and the REIT would still have an FFO that is higher than its dividend.
Why the stock could soon rise
One potential catalyst looming in 2024 that could get investors excited about MPT is the possibility of a decline in interest rates. REITs have become less desirable investments in an increasing interest rate environment. But as that changes, the pendulum could swing in the other direction, and a beaten-up stock such as MPT could suddenly look much more attractive.
Not only is there ample room in the FFO to cover the dividend, but a reduction in interest rates could also help lead to more growth opportunities for MPT. And at less than 7 times its estimated future earnings, the stock comes incredibly cheap right now. All those factors could set MPT's stock up for some big gains in the future.
Is Medical Properties Trust the best deal for income investors right now?
MPT isn't the safest dividend stock to own, not by any stretch. It has slashed its dividend payment, its tenants are not rock-solid, and it has incurred $309 million in interest expenses over the past nine months. There are plenty of reasons for investors to steer away from the stock and to look for safer dividend stocks to buy instead.
If, however, you're a contrarian investor with a high risk tolerance, MPT could be a great buy for you and possibly be among the best dividend stocks in 2024. Its low valuation gives the stock the potential to rise significantly in value, especially if interest rates come down. And with a dividend that looks safer than the one MPT was offering a year ago, investors have the potential to take advantage of both a high yield and a low valuation. If you're comfortable with the risk, the stock could make for a great contrarian investment to load up on right now.
