2 Dividend-Paying Stocks Income Investors Should Avoid
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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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1. Medical Properties Trust
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.
2. Walgreens Boots Alliance
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%.