The stock market is home to many excellent dividend stocks. It is 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 won’t — or shouldn’t — appeal to them, at least not for this narrow purpose.
It might not always be easy to recognize which of these two categories a corporation that pays dividends falls into, but let’s consider two stocks that dish out regular payouts but don’t look like top dividend stocks: Medical Properties Trust(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 yields. The company’s forward yield of 6.91% is high by any market standard — it is substantially above the S&P 500‘s (SNPINDEX: ^GSPC) average of 1.32%.
But there is more to the story. Not long ago, MPT’s yield was more than twice that until the company cut its payouts twice in one year. What happened?
The company encountered issues as one of its major tenants, Steward Healthcare, couldn’t pay its rent. REITs must distribute at least 90% of their taxable income as dividends, so MPT can’t legally suspend its 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 move beyond this significant headwind.
MPT has found tenants to occupy 15 of the 23 hospitals previously owned by Steward Healthcare. These new tenants will only start paying rent 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 grants the company more diversity, so it will be less likely to incur significant losses due to a single tenant defaulting on its rent. Further, these new occupants signed an average lease term of 18 years, granting MPT a predictable source of income for the next two decades.
The company is moving in the right direction, but it’s too early to celebrate. MPT remains a somewhat risky income stock, given its recent history. I’d advise dividend seekers to avoid this company for now.
MPT wasn’t the only high-profile dividend stock to cut its payouts in the past couple of years. Retail pharmacy giant Walgreens did the same. In January, Walgreens announced it was decreasing its dividend by 48%.
It wasn’t much of a surprise: The company had been dealing with slow revenue growth and more than occasional net losses for a few years. Walgreens’ fourth quarter 2024 — ending on Aug. 31 — was no different. Its revenue increased by just 6% year over year to $37.5 billion.
On the bottom, Walgreens’ loss per share of $3.48 was far worse than the net loss per share of $0.21 reported in the year-ago period. Walgreens has mentioned the challenging U.S. retail environment as one of the factors responsible for its poor performances. Amazon (among others) is competing with the company, with its Amazon pharmacy unit launching in late 2020.
Amazon, which already has a vast army of loyal Prime members who rely on it for everything from groceries to books and electronic purchases, offers free rapid delivery options for medicines to its members. For many patients, it’s more convenient to bundle purchases through Amazon.
Many others feel the same about Walgreens, but the added competition isn’t helping the company.
Is there any hope for the 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 been expanding its footprints in the primary care market, something that could add some much-needed diversity in case its retail pharmacy segment remains under pressure from competitors.
Will these initiatives bear fruit? Maybe, but for now, Walgreens’ recent dividend cut and persistent financial underperformances mean it isn’t attractive for dividend investors, despite its super high forward dividend yield of 10.7%.
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