1 A Costly Mistake in Relying on Medical Properties That Investors Can Make

medical property trust (MPW 0.48%) It’s a high-yielding dividend stock that may look safe for now. It offers investors an attractive dividend of 13% of his, largely because the stock has fallen more than 50% of his in the last 12 months.

Healthcare-focused real estate investment trusts (REITs) now have enough money from their operations to support their dividends, suggesting this could be a good contrarian buy. I’m here. But investors shouldn’t get too complacent about the dividend and the stock overall. And assuming that everything is fine can prove to be a costly mistake.

Dividend cuts don’t always come with warning

The big danger for medical property investors is the potential for REIT performance to deteriorate and tenant defaults to rise. after that There is a dividend cut. But the reality is that management could cut payouts significantly before all this happens. Ultimately, investors will look ahead to the issue before it is reported in the financial statements.

I’ve been in that situation before when dividend stocks yielded as high as 10% and their financials were strong enough to support the payouts. But even before things got worse, management preemptively cut payments. And since it was the REIT that investors were largely relying on for dividends, the stock price plummeted as well.

There was no forewarning, but my only saving grace is that I’ve held stocks long enough that I haven’t lost money on investments, even after years of paying big dividends. That was it.

My concern is that Medical Properties may follow a similar path.

REITs are fine for now, but don’t assume dividends are safe

I see the same dangers ahead for investors in the Medical Properties Trust. His funds under management (FFO) per share for the REIT’s most recent quarter (ending March 31) was $0.31, topping his quarterly dividend payout of $0.29. But that wouldn’t be a big buffer for the company, especially since Medical Properties has already dealt with uncollected rent if things go bad.

There have been positive developments with hospitals reporting stronger financial conditions that could help make medical facilities safer dividend stocks. Many REIT tenants are hospitals. But the reality is that there are still many risks in REIT finances that put their payouts at risk. One of his top tenants, Prospect Medical, didn’t pay rent in full in January and his February could be a canary in a coal mine for investors.

Investors should not bet on this dividend stock

Medical Properties Trust may be able to keep its dividend payouts and weather the storm. But storms can last for a while. The recession has not yet hit the economy, and if it does, REITs and their tenants could face an even more severe challenge. This doesn’t bode well for his REIT, which already has a small buffer between his FFO and quarterly dividend per share.

Medical Properties’ dividend is attractive, but only if it’s sustainable. I am not convinced that is the case. At a time when many companies have cut dividends and the economy’s future is uncertain, this is too risky to be a sustainable investment. Moreover, REITs have no track record as successful investments, leaving little reason for optimism.

David Jagielski has no positions in any of the mentioned stocks. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.

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