Dividend stocks can be great investments. The best ones generate passive income and provide some stock price appreciation.
However, stocks with high dividend yields can be a trap. The payouts might not be sustainable, which can cause investors to see a drop in their income and the value of the stock. Medical Properties Trust (NYSE: MPW) and Brandywine Realty Trust (NYSE: BDN) currently look like potential dividend traps, according to a couple of Fool.com contributors. Here’s why they think investors should avoid them like the plague this month.
Marc Rapport (Medical Properties Trust): Medical Properties Trust is one of the world’s largest private owners of hospitals and similar properties, with 444 properties and about 44,000 licensed beds in 10 countries.
The Birmingham, Ala.-based company also is a real estate investment trust (REIT), obliged by tax law to pay out at least 90% of its taxable income as dividends, and it’s done so reliably for decades. That $0.15-per-quarter dividend is currently good for a yield of a very nice 9% at the share price of $6.54 earlier this week.
It also may well be a yield trap. As expected, MPT recently cut its dividend nearly in half, and the company remains mired in well-publicized financial struggles as it tries to right a sinking ship.
The problems are complex and large, including high debt load from acquisitions and some key tenants struggling themselves as they continue to recover financially from the pandemic. It also didn’t help when MPT’s practice of financially supporting its operators ran into a major snag when California regulators put a hold on such a deal this summer.
MPT has been selling off some of its properties to help lower the debt load, but that also reduces its cash flow. The market hasn’t been impressed. MPT shares hit an all-time high of about $21 in January 2022 before the current plunge, as shown in the preceding chart. Has it hit bottom?
The company does own a lot of properties in a most-essential industry, and that possibility always remains. But why get trapped in it now when there may be better alternatives? I used to own MPT shares, and I may again. But the time doesn’t look right just yet.
The company expects its dividend payout ratio to be between 90% and 100% of its cash available for distribution this year. So it’s not retaining much money to fund its development and redevelopment projects. That’s forcing the company to get creative to finance new investments.
It recently sold an office building in Austin, TX, for $53.3 million. It also closed a construction loan for $50 million. These transactions are helping bridge the gap in its capital plan between its sources of cash and needs.
However, funding its capital plan is only one of its issues. Brandywine also has upcoming debt maturities it needs to address. The next one is a $350 million maturity in October 2024. While the company has time to refinance this debt, it will likely pay a much higher rate. For example, it was able to refinance a $350 million 2023 debt maturity late last year. The issue was that the 7.55% interest rate on the new 2028 notes was much higher than the 3.95% interest rate on the maturing debt.
Future debt maturities will likely increase the company’s interest expenses, cutting into its cash flow. While Brandywine has some development projects that should start generating rental income as they come online, it faces occupancy and rental rate headwinds at older properties.
These factors all put the dividend at risk of reduction. Brandywine’s management team noted on the second-quarter conference call that their board is closely monitoring the dividend. The company seems increasingly likely to cut its payout, which could come as soon as the current quarter. Given that and all its other headwinds, investors should steer clear of this office REIT.
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Marc Rapport has no position in any of the stocks mentioned. Matthew DiLallo has positions in Medical Properties Trust and has the following options: short January 2024 $8 puts on 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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