Is This High-Yield Dividend Stock Too Good to Be True?

Clearly, one of the most important things dividend investors need to consider when choosing a stock is its yield. While you likely want a dividend that pays better than the S&P 500 average of 2%, you also need to be careful not to choose a yield so high that it's not safe.

Unfortunately, there's no magic percentage that counts as "too high" in every circumstance, but I typically consider anything over 5% to be worth investigating a bit further. One stock that meets that criterion today is Medical Properties Trust (NYSE: MPW), which pays investors 5.8% on an annual basis. That's far better than the S&P 500 average, but is the payout safe, and should investors expect dividend increases? Let's take a closer look to find out and see whether the stock is worth adding to your portfolio today.

Can the company support its current dividend?

Medical Properties is a real estate investment trust (REIT), which means that the company needs to pay out more than 90% of its earnings to shareholders. Obviously, that means a payout ratio over 90% is not necessarily a cause for alarm. But investors still need to consider whether the company's financials are truly strong; just because a company is a REIT doesn't automatically mean that its dividend is safe.

Hospital building with h sign displayed.

Image source: Getty Images.

A key metric to consider in REIT investing is funds from operations (FFO), which is often a better metric to use than accounting income because it does not include depreciation, a non-cash expense that can make a REIT's financials look worse than they really are. 

In its most recent quarterly results, which Medical Properties released on July 30 for the period ending June 30, the Alabama-based business reported FFO per share of $0.35, which is up 16.7% from a year ago. On a year-to-date basis, FFO per share rose to $0.67, up 11.7% from $0.60 in the prior-year period.

Medical Properties currently pays a quarterly dividend of $0.27 per share, and the FFO is currently strong enough to support those payments; the payout ratio comes out to 77%. Investors looking solely at accounting income, which was $0.21 per share in the second quarter, could be concerned that Medical Properties is paying out more than 100% of its income in dividend payments. But Foolish investors know by using FFO that the dividend remains safe today.

The business still looks strong moving forward

Amid the market craziness of the coronavirus pandemic, investors need to consider whether a dividend that's safe today is likely to remain so. There, the news is good for Medical Properties -- management stated in its earnings release that the company still expects to collect 100% of the rent its tenants owe. They're expecting 98% of those collections to take place this year, with the remaining 2% on payment plans they expect to be collectible.

Management's confidence that it will collect all its rent is a testament to the remarkable strength of the REIT's portfolio of assets, which features 389 facilities across eight countries. And with a focus on hospitals, Medical Properties' tenants offer stability; if the company relied on retail or residential tenants to pay rent, it would likely be in a much more difficult position today.

Is Medical Properties a buy?

Medical Properties' dividend yield looks safe, making the company one of the better REITs you can invest in today. One reason its dividend yield is a bit high this year is that its stock is down and underperforming the S&P 500:

MPW Chart

MPW data by YCharts

Dividend yield is ultimately a function of price and dividend payments -- if the price drops, the yield goes up. But Medical Properties' current yield is actually lower than it's been in the past:

MPW Dividend Yield Chart

MPW Dividend Yield data by YCharts

For income investors, there isn't much to worry about with Medical Properties today. Although its yield is a little high, it's definitely not too good to be true. And with a strong business model centered around the healthcare industry and rent collection seemingly not a problem, it could be a great investment to add to your portfolio.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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