The stock market is home to many excellent dividend stocks. It’s also home to many companies that pay dividends but aren’t necessarily attractive income stocks. Income seekers want to invest in the former, while the latter doesn’t appeal to them (or shouldn’t), at least not for this narrow purpose.
It may not always be easy to recognize which of these two categories a dividend-paying company falls into, but let’s take a look at two stocks that pay regularly but don’t look like top dividend stocks: Trust medical properties (NYSE: MPW) And Walgreens Boots Alliance (NASDAQ: WBA).
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Medical Properties Trust (MPT), a real estate investment trust (REIT) focused on the healthcare sector, is an excellent example of why dividend investors shouldn’t just chase high returns. The company’s forward yield of 6.91% is high by any market standard; it is substantially above the S&P500‘S (SNPINDEX: ^GSPC) average 1.32%.
But there is more to the story. Not long ago, MPT’s returns were more than double, until the company cut its payouts twice in one year. What happened?
The company encountered problems because one of its main tenants, Steward Healthcare, was unable to pay rent. REITs must pay out at least 90% of their taxable income as dividends, so MPT cannot legally suspend payouts altogether. But investors want to see dividends grow, not shrink. Steward Healthcare, MPT’s troubled tenant, has filed for bankruptcy and the healthcare REIT has devised a plan to overcome these significant headwinds.
MPT has found tenants for 15 of the 23 hospitals previously owned by Steward Healthcare. These new tenants won’t pay rent until next year, and even then they won’t pay the full amount until the fourth quarter of 2026.
Still, this is a win for MPT: It gives the company more diversity, making it less likely to suffer significant losses if a single tenant can no longer pay its rent. Furthermore, these new residents signed an average lease term of 18 years, giving MPT a predictable source of income for the next twenty years.
The company is moving in the right direction, but it is still too early to celebrate. MPT remains a somewhat risky income stock given its recent history. I would advise dividend seekers to avoid this company for now.
MPT wasn’t the only high-profile dividend stock to cut its payouts in recent years. Pharmacy giant Walgreens did the same. In January, Walgreens announced it would cut its dividend by 48%.
It wasn’t much of a surprise: the company had been dealing with sluggish revenue growth and more than incidental net losses for a few years. Walgreens’ fourth quarter 2024 – ending August 31 – was no different. Revenue rose just 6% year over year to $37.5 billion.
On the low end, Walgreens’ loss per share of $3.48 was much worse than the net loss per share of $0.21 reported in the same period last year. Walgreens has cited the challenging US retail environment as one of the factors responsible for its poor performance. Amazon (among other things) competes with the company, with the Amazon pharmacy launching in late 2020.
Amazon, which already has a huge army of loyal Prime members who depend on it for everything from groceries to books and electronic purchases, is offering its members free fast drug delivery options. For many patients it is more convenient to bundle purchases via Amazon.
Many others feel the same way about Walgreens, but the added competition isn’t helping the company.
Is there still hope for Walgreens? The company recently announced it would close 1,200 stores over the next three years to cut costs and become more efficient. The company has also expanded its presence in the primary care market, something that could provide some much-needed diversity as the retail pharmacy segment continues to come under pressure from competitors.
Will these initiatives bear fruit? Maybe, but for now, Walgreens’ recent dividend cuts and continued financial quid pro quo make it unattractive to dividend investors, despite its super-high 10.7% dividend yield.
Consider the following before purchasing shares in Medical Properties Trust:
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2 Dividend Paying Stocks Investors Should Avoid was originally published by The Motley Fool
