Despite two dividend cuts in the past two years, Medical Properties Trust (NYSE: MPW) still offers a pretty enticing dividend. The hospital-focused real estate investment trust (REIT) yields around 6.5%. That's several times above the S&P 500, which currently has a less than 1.5% dividend yield.
The healthcare REIT's high-yielding payout is finally getting healthier, which is making it a more enticing option for income-seeking investors. However, it's not as healthy as the nearly 5%-yielding dividend paid by NNN REIT (NYSE: NNN). The retail REIT recently delivered a milestone dividend increase.
A higher-risk, high-yielding income stock
Medical Properties Trust's problems over the past two years have stemmed from one overarching issue: It took on too much risk. The REIT invested aggressively in expanding its portfolio by partnering with hospital operators that were aggressively expanding their networks. As a result, the hospital owner had a high tenant concentration, with more than 60% of its assets leased to its top five tenants at the end of 2022, and a significant percentage of its properties leased to operators that had stretched themselves too thin. When they ran into trouble and couldn't pay their rent, it had a significant impact on Medical Properties Trust's financial situation.
The REIT also couldn't refinance its hefty debt load as it matured because of much higher interest rates and its tenant issues. That forced it to sell off other hospital properties to shore up its financial situation. It also had to cut its dividend payment twice to retain additional cash to repay debt.
Those moves have started to pay off. The company is now on a much firmer financial foundation after it significantly enhanced its liquidity. Meanwhile, its hospital portfolio is improving, as it has replaced troubled tenants with financially stronger hospital operators. Its high-yielding dividend is now on a much more sustainable foundation.
As the REIT's balance sheet and portfolio continue to improve, it should be in a position to start increasing its dividend again. It's a very enticing option for income-seeking investors willing to take on a bit more risk for a higher yield and higher upside opportunity.
A model of consistency
NNN REIT has a much more conservative investment approach. While it focuses on a single property type of freestanding net lease retail properties, it has a well-diversified portfolio. The REIT owns about 3,350 properties leased to over 375 tenants in more than 35 lines of trade. Its top tenant comprised only 4.4% of its annual base rent last year, while the top 20 made up less than 50%. Meanwhile, it didn't have a high concentration among its top lines of trade. Convenience stores were 16.4% of its base rent, automotive service were 15.6%, and restaurants were 8.7% for full service and 8.5% for limited service.
The REIT also limits risk by maintaining a conservative financial profile. Its dividend payout ratio is currently only 67%. Meanwhile, it has a conservative balance sheet with a low leverage ratio. It also has the longest weighted average debt maturity schedule in its peer group, at 12.6 years, so it doesn't have to deal with a lot of debt maturities each year, which has been a problem for Medical Properties Trust in the recent past.
NNN REIT's more conservative approach has really paid dividends over the years. The REIT recently delivered its 35th consecutive annual dividend increase. That put it in a very elite group. Only two other REITs and less than 80 publicly traded companies currently have reached or exceeded that milestone.
The retail REIT has the financial flexibility to continue expanding its portfolio and dividend in the future. It's a great option for those seeking a very bankable and steadily rising stream of dividend income.
A low-risk way to generate income
Medical Properties Trust has struggled in recent years because of a more aggressive approach. While it's starting to recover from its challenges, which is putting its high-yielding payout on a more sustainable foundation, it's still a riskier option for income-seeking investors.
NNN REIT, on the other hand, pays a very bankable dividend. The REIT has delivered 35 years of steady dividend growth thanks to its more conservative approach. With more dividend growth very likely, it's a great option for those seeking more income certainty.
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Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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