One of the most important things that dividend investors need to consider when choosing a stock is its yield. While you may want a dividend that pays better than the S&P 500 average of 2%, you also need to be careful that the yield isn't so high that it's not safe.
Unfortunately, there's no magic percentage that will tell you whether a yield is too high or not, but I typically consider anything over 5% to be worth a closer look. And one stock that falls over that threshold today is Medical Properties Trust (NYSE:MPW), which pays investors 5.8% on an annual basis. It's far better than what the S&P 500 pays -- but is the payout safe and should investors expect the dividend payments to continue? Let's take a closer look to find out and see whether the stock is worth adding to your portfolio today.
Can the company support its current dividend?
Medical Properties is a real estate investment trust (REIT), which means that the company needs to pay out more than 90% of its earnings to shareholders. And so if its payout ratio is over 90%, that's not necessarily a cause for alarm. But investors still need to consider the company's financials and whether or not they're strong enough, as simply being a REIT doesn't mean that a dividend is safe.
A key metric that REIT investors will look at is funds from operations (FFO), which is often a better metric to use than accounting income since it won't include depreciation, a non-cash expense that can make a REIT's financials look worse than they really are.
In its most recent quarterly results, which Medical Properties released on July 30 for the period ending June 30, the Alabama-based business reported FFO per share of $0.35, which is up 16.7% from a year ago. On a year-to-date basis, FFO per share rises to $0.67, and that's also up 11.7% from $0.60 in the prior-year period.
With the company paying quarterly dividend payments of $0.27 per share, the FFO is currently strong enough to support those payments because the payout ratio comes out to 77%. If investors were looking at accounting income, which was $0.21 per share in the second quarter, there could be a concern that Medical Properties is paying out more than 100% of its income in dividend payments. But Foolish investors know that by using FFO, it's clear that the dividend remains safe today.
The business still looks strong moving forward
Amid the coronavirus pandemic, a big question mark for investors is whether the dividend will remain safe, not only if it is safe today. However, Medical Properties stated in its earnings release that the company still expects to collect 100% of the rent that tenants owe. It's expecting that 98% of those collections will take place this year, with the remaining 2% being on payment plans, but it still believes those will also be collectible.
Medical Properties' confidence in collecting all of its rent payments is a testament to just how strong the REIT's portfolio of assets is, which features 389 facilities across eight countries. And with a focus on hospitals, Medical Properties' tenants offer the REIT a lot more stability than if the company relied on retail or residential tenants to pay rent, which would likely be much more difficult.
Is Medical Properties a buy?
Medical Properties' dividend yield looks safe, making the company one of the better REITs that you can invest in today. And one reason that its dividend yield is a bit high this year is that its stock is down and underperforming the S&P 500:
Dividend yield is ultimately a function of price and dividend payments. And if the price drops, then yield goes up. However, Medical Properties' current yield is actually lower than where it's been in the past:
For income investors, there isn't much to worry about with Medical Properties today. Although its yield is a little high, it's definitely not too good to be true. And with a strong business model centered around the healthcare industry and rent collection seemingly not a problem, it can be a great investment to add to your portfolio.