Is Medical Properties Trust's High-Yielding Dividend Worth the Risk?

The stock’s yield is up around 14%, and that’s even with the company reducing its payout last year.

Medical Properties Trust (MPW 0.74%) is a risky stock to own — no doubt about it. Anyone who has been following the company closely knows that it has been on a tough road the past few years, especially involving its troubled tenant, Steward Health. And the real estate investment trust (REIT) already had to reduce its dividend payments last year to give itself a bit more breathing room.

Some investors, however, may still think this is a stock worth taking a chance on. After all, if a dividend cut has already happened, and if the bad news with Steward Health is coming to a head, then these negative factors are potentially already priced into the stock’s current valuation. And if its current dividend is sustainable, it may be a bargain, because its yield remains incredibly high at around 14%.

Could Medical Properties Trust be a stock worth taking a chance on right now, or should investors simply stay away from this troubled investment?

Is Medical Properties’ dividend really safe?

On May 9, Medical Properties posted its results for the first three months of 2024. And while the REIT incurred a loss, its normalized funds from operations (FFO) were a positive $0.24 per share. FFO is a key metric for REITs because it factors out impairment charges and one-time gains and losses. It can be a better indicator of just how well the company is able to pay its dividend.

Investors may point to that reasonably strong FFO number as proof that the company can afford its quarterly dividend of $0.15. But the problem is that the business is in the middle of a turbulent time. Medical Properties has been selling assets in order to strengthen its financial position and inject more liquidity into its operations. In the first five months of the year, the company says it has been able to raise $2.4 billion in liquidity (above its target of $2 billion) through the sale of assets.

The problem is that as it sells its interest in hospitals, it reduces the size of its portfolio, which means there will be fewer tenants paying rent. And with Steward Health still in the middle of bankruptcy proceedings, the biggest uncertainty still lies with what happens with arguably its most important tenant and its 31 hospitals. A year or two from now, Medical Properties’ financials may look very different, and while its latest reported FFO figure may imply the dividend is sustainable today, that may not be the case in the future.

Further losses could offset the dividend income

You have the potential to generate a lot of dividend income from investing in Medical Properties Trust. To collect $1,000, for example, you might need to invest around $8,000 into the stock. And if the stock falls and you buy it at a lower price, you may need to invest even less than that.

But therein lies the danger: Medical Properties has been an awful investment to own over the years (it’s down around 80% in just three years), and things aren’t getting better right now. If you invest $8,000 into the stock and the REIT continues to pay dividends for the full year, then you’ve indeed earned around $1,000 in dividends. But if the stock falls by just 13% during that time, those losses would wipe out that dividend income.

And depending on how the situation unfolds with Steward, there’s the potential that Medical Properties reduces its dividend again, or potentially even suspends it if there’s too much uncertainty. Not only could that jeopardize how much you might collect in dividends, but it may result in further stock losses as well.

Medical Properties isn’t worth gambling on

If you buy shares of Medical Properties Trust today, it’s hard to not consider it a gamble at this point. Considering all of the unanswered questions about the REIT, it’s impossible to determine whether this can be a safe investment to hold in your portfolio. It’s not an investment I’d feel comfortable holding given all that risk.

If your priority is to collect dividend income, you’re likely better off looking at other, safer dividend stocks to own. Medical Properties does possess a lot of potential upside if it can come out of all this a better company in the end, but that’s still a big “if” at this point. I see the stock as a contrarian investment that is perhaps appropriate for people with a high risk tolerance, but it probably won’t be a suitable option for risk-averse dividend investors.

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.

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