A double-digit dividend yield is usually a warning sign. It suggests investors not I think the payout is on solid footing due to the company’s financial problems. More often than not, stocks with double-digit returns ultimately cutting or suspending their dividends.
But it is not always the case. Some companies can get through the rough patches without cutting back on their payouts. NextEra Energy Partners (NYSE: NEP) And Reliance on medical properties (NYSE: MPW) believe they can maintain their large dividends. If they can do that, investors can generate a lot of income. Here is take a look at what drives these views and what can go wrong?
Operates in energy saving mode
NextEra Energy Partners’ dividend currently yields more than 10%. At that rate, it could turn a $1,000 investment into more than $100 by annual dividend income. The renewable energy The producer supports that payout with relatively stable cash flow generated by selling power to utilities and large corporate buyers under long-term, fixed-rate contracts.
The company expects to continue increasing its large payouts. It aims to achieve annual dividend growth of 5% to 8% at least through 2026, with a target annual increase of 6%. NextEra Energy Partners expects to achieve this growth by re-powering existing wind farms (replacing older turbines with larger, more powerful ones). These high-return projects should increase revenues for a modest investment.
However, there are some caveats. NextEra Energy Partners expects this dividend payout ratio in the mid-1990s, which leaves little room for error. Moreover, that growth rate is a slowdown from the original plan to achieve annual dividend growth of 12 to 15 percent through 2026.
Higher interest rates made it challenging to finance the acquisitions needed to achieve that higher growth rate, especially given the company’s need to buy out convertible equity portfolio financings (CEPFs). It Acquisitions have been made in the past.
NextEra Energy Partners is addressing these CEPF buyouts by selling its natural gas pipeline assets. Last year it sold its STX Midstream portfolio for nearly $1.9 billion, which will fund buyouts of the associated STX Midstream CEPF and its NEP Renewables II CEPF, which expire next year. The company plans to sell its Meade pipeline business next year to finance additional CEPF buyouts.
If NextEra Energy Partners can execute on its strategy and rates finally start to fall, it should be able to continue raising its dividend. However, if the country faces more challenges, it may have to cut or suspend its dividend to save extra money to strengthen its financial situation.
Become healthier
Medical Properties Trust currently yields about 12%. The hospital-focused REIT has struggled problems with tenants and balance problems. It has already cut its dividend once to leave more money for debt reduction.
The healthcare REIT has taken several additional steps to address these issues. It is working to sell hospitals, including those associated with troubled tenants. These deals have provided cash to help the country repay maturing debt that it has been unable to refinance on acceptable terms. The REIT was recently able to do this too refinance part of the debtswhich extends the term by almost ten years.
The recent deals have increased liquidity by $2.4 billion, surpassing its 2024 target of $2 billion. And that number should continue to grow. Medical Properties Trust is working to find new tenants for all properties currently leased to its top tenant, which recently went bankrupt. It could eventually sell some of those properties to the new operators. The company is also working to sell its stake in a managed care company tied to another troubled tenant, which could raise additional cash.
Medical Properties must continue to strengthen its portfolio and balance sheet. If it can successfully replace its top tenant with new operators, these properties will be regenerated full rental income. However, the REIT may have to cut its payout again if it cannot find high-quality operators to leverage existing rental rates or if other tenants run into trouble.
High-risk, high-reward revenue streams
NextEra Energy Partners and Medical Properties Trust offer investors high-yield income streams and upside potential. However, due to their financial problems, they also have a higher risk profile. Therefore, they are best for investors who are willing to take on more risk with the prospect of higher reward.
Should you invest $1,000 in NextEra Energy Partners now?
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Matt DiLallo has positions in Medical Properties Trust and NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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