With the new bull market in full swing and making waves thanks to frothy bets on artificial intelligence stocks, dividend investors have the same objective as always: Finding safe income streams. But the most rock-solid dividend stocks tend to be expensive for that very reason. It's not much of a risk to bet on entrenched incumbents, so their dividend yields are typically on the low side.
On the other hand, betting on beaten-down players making a turnaround offers the potential for outsize returns in the future, if perhaps in exchange for some anxiety between now and then. That does not make every struggling dividend-paying business a smart investment, however. Here's an example of one very tempting stock to avoid buying right now, whether it's a bull market or not.
This company's balance sheet leaves a lot to be desired
There's a smorgasbord of evidence suggesting that Medical Properties Trust (MPW -1.10%) stock will not be able to deliver a reliable stream of cash to its shareholders despite being a real estate investment trust (REIT) in the relatively slow-moving healthcare sector.
Some of that evidence pertains to the company's unmanageable debt load of $10.1 billion, nearly $3 billion of which will be due in 2026. Another piece of evidence is its trailing-12-month (TTM) cash from operations (CFO), which at $551 million is down by 21% over the last three years and shows no signs of recovering, thereby making paying down the debt an even more distant goalpost. Then there are the ongoing troubles with its largest tenant, Steward Health Care, which partially defaulted on paying its rent more than once last year. And last but not least, there's the fact that it already cut its dividend payment in the middle of 2023.
But perhaps the biggest reason why MPT is not a reliable stock to buy for dividend income is that investors cannot be confident in its management.
For example, in late 2022 it authorized a share repurchasing program of up to $500 million, expiring in late 2023. Businesses often announce such programs to bolster investor confidence, as having extra cash to return to shareholders is a sign of financial strength. Of course, MPT didn't actually have the excess cash flow to divert to its shareholders at the time of the program's initiation, so the overwhelming majority of the allocation went unused. It is unclear what the purpose of the move was.
There are other communications that bear questioning. In its first-quarter earnings report in 2022, company leaders lauded the strong performance of its tenants as well as its own history of providing dividend growth. Remember, at that time, slashing its dividend was a bit more than one year away, and some commentators were already noticing the cracks in the foundation. It is difficult to believe that the C-suite did not understand that trouble was brewing.
Then, in its Q1 earnings update in 2023, management's tune remained as bullish as ever, as it discussed how the REIT's recent performance "establishes a baseline level of profitability that supports our dividend payments and sets the table for continued growth." People who invested based on that confidence have since seen their shares lose a lot of their value, and yield less income as well.
Don't expect relief from the bull market here
There is an improbable outcome in which the new bull market acts as a rising tide that lifts all stocks, including Medical Properties Trust. In such a situation, it might be the case that people who invest in this REIT today see their shares rise. There is also the possibility that MPT will be able to sell off enough of its assets to survive the next few years of debt repayment, eventually becoming financially sustainable in the long term.
But these scenarios are not actually investing theses to risk your portfolio on. They're somewhere between long shots and pipe dreams. And when considering the messaging from management, it is not clear whether investors have access to enough high-quality information from insiders to even make a decision of good quality. So avoid buying shares of this company, and don't let the big dividend yield fool you into thinking that the payout will actually arrive consistently as advertised.
