If you’re looking for stocks with dividend yields above 10%, you know there will be some risk. However, it is also possible that markets have not adjusted and are not properly pricing a stock that might currently be less risky than it once was. Sometimes it can take a while for investors to get used to a struggling dividend stock, especially if it has burned them in the past.
Medical Properties Trust (NYSE:MPW) certainly falls into this category. It recently cut its dividend and the stock has been a terrible investment, losing half its value in 2023. But could this stock be undervalued and potentially be the best deal for income investors today?
Medical Properties Trust’s yield remains high despite sharp decline
Real estate investment trust (REIT) Medical Properties Trust’s portfolio is focused on hospitals, which in normal years should provide investors with a lot of stability. But the last few years have been anything but typical for the healthcare industry, and REIT tenants haven’t fared very well.
As a result, MPT had to cut its quarterly dividend in 2023 from $0.29 to just $0.15. The REIT felt this was the right move to strengthen its balance sheet and help free up cash to pay down debt, which totals more than $10 billion.
The dividend cut, however, led to a sharp sell-off in MPT’s value, with the struggling stock falling further. As a result, even with a reduced payout, the REIT still yields a fairly high percentage, just over 12%. Investors simply aren’t convinced that the company’s struggles, which have involved problem tenants not paying their rent in full in the past, are the cause of MPT.
The company’s new dividend does not appear to be under threat
During the first three quarters of 2023, MPT reported funds from operations (FFO) per share of $1.24. And for the full year, he 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 that REITs rely on to assess the safety of their dividend payments and investors use it often. instead of net income because it excludes depreciation and gains and losses. With a high FFO relative to its dividend, MPT’s profits could be cut in half and the REIT would still have a higher FFO than its dividend.
Why the stock could rise soon
A looming potential catalyst in 2024 that could get investors excited about MPT is the possibility of lower interest rates. REITs have become less desirable investments in a rising interest rate environment. But as that changes, the pendulum could swing the other way, and a struggling stock like MPT could suddenly look a lot more attractive.
Not only does the FFO have ample margin to cover the dividend, but a reduction in interest rates could also help create more growth opportunities for MPT. And at less than 7 times its estimated future earnings, the stock is currently incredibly cheap. All of these factors could set MPT stock up for significant gains in the future.
Is Medical Properties Trust the best deal for income investors right now?
MPT is not the safest dividend stock to own, far from it. It has cut its dividend payout, its tenants are not strong and it incurred $309 million in interest costs over the past nine months. There are many reasons why investors are moving away from stocks and looking for safer securities. dividend stocks buy instead.
If, however, you are 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 ‘dramatically increase its value, particularly if interest rates fall. And with a dividend that appears more secure than what MPT offered a year ago, investors have the potential to enjoy both a high yield and a low valuation. If you’re comfortable with risk, the stock could be a great contrarian investment to invest in right now.
Should you invest $1,000 in Medical Properties Trust right now?
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Is This 12% Dividend Stock the Best Deal for Income Investors in 2024? was originally published by The Motley Fool