If a dividend stock has cut its payout, investors might be tempted to think that it won't reduce it again for a while. After all, the company would want to avoid making such a negative announcement once, let alone twice.
And if it has to reduce its dividend multiple times within a short period, that can be a sign that it doesn't have a good grasp of just how strong its financial results will be in the future.
That's what happened recently with Medical Properties Trust (NYSE: MPW). The real estate investment trust (REIT) announced that it would be reducing its dividend yet again. The stock still pays investors a high dividend, but can they rely on the payout and trust that it will be safe?
Medical Properties' dividend is down 72% in roughly a year
It was August of 2023 when Medical Properties Trust announced that it would be reducing its quarterly dividend from $0.29 to $0.15 in light of issues with its tenants, including a particularly troubled one in Steward Health, which recently filed for bankruptcy protection.
But now in 2024, the REIT has cut its quarterly dividend yet again, to just $0.08. The company's annual dividend rate of $0.32 is now just a few cents higher than what it was paying its investors a few years ago every quarter.
The new dividend, however, means that investors are still earning a fairly high yield. Based on its closing share price of $6.37 last week, the yield is just over 5%, which remains far higher than the S&P 500 average of 1.3%.
In the past, the REIT's yield was above 10%, which is normally a sign of trouble; if it were safe, investors would be aggressively buying up a dividend stock with such a high payout.
Does the lower yield make the stock a safer buy?
Medical Properties Trust is still paying a relatively high dividend, but the biggest risk is not knowing what lies ahead for the company. The REIT has been selling off assets in order to improve liquidity. And it is transitioning properties away from Steward Health and onto new operators, which should provide it with a bit more stability.
But until investors know just how much funds from operations (FFO) the REIT is going to be generating on a consistent basis, it will be hard to know whether the current dividend is safe and sustainable, or if it might still be too high.
While it might seem unlikely to expect a third cut to the payout, investors should brace for anything at this point given how volatile the business has been in recent years. Over the first six months of 2024, the company reported an FFO loss of $869.5 million versus a profit of $525.9 million during the same period last year.
Should you take a chance on Medical Properties Trust stock?
Shares of the REIT are up around 30% in just the past month on the news of the company moving away from Steward Health, even despite the seemingly bad news of yet another dividend cut. There's clearly some optimism that the company might finally be on a positive track. And while that might be true, my concern is that it's still anything but a guarantee how the business will perform and how safe the new tenants will prove to be.
And with so many other dividend stocks out there that provide comparable yields without nearly as much risk, I just don't see a compelling reason to even bother with Medical Properties Trust right now given its uncertainty. I would put the stock on a watch list and monitor how it does in future quarters to see if it can get back to generating positive FFO, but until it does, I wouldn't seriously consider buying shares of the REIT.
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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.
This High-Yielding Dividend Stock Just Cut Its Payout for a 2nd Time in a Year was originally published by The Motley Fool