Buying dividend stocks that have seen better days can be a great way to ensure you're exposed to the possibility of gain from a turnaround. It's also a great way to get a higher yield on your shares than you would otherwise, and that can add up to make for a big benefit over time.
But not every recently tarnished dividend stock is a smart purchase. In fact, many will burn your money and dash your hopes for passive income. So here's one example of a dangerous dividend stock to avoid, and one that's a solid choice for a long-term hold.
Avoid Medical Properties Trust
Shares of Medical Properties Trust(MPW 2.33%), a healthcare real estate investment trust (REIT), are down by 76% in the last three years. That's a big part of the reason its forward dividend yield is upwards of 27%. Critically, this isn't a stock to buy on the dip to capture its outsized yield. It's one to examine as a lesson for what to look out for and avoid.
In a nutshell, Medical Properties Trust buys and rents out healthcare facilities to its tenants, some of whom it invests in. There are many things that can go wrong with that process.
If it uses too much debt while buying properties, the costs of servicing the interest payments can become unsustainably high relative to its income. Its debt load is currently in excess of $10 billion, or 122% of its equity. In 2026, it'll need to repay close to $3 billion in debt; it has only $340 million in cash on hand now, and its trailing-12-month net losses are $33 million.
If its tenants encounter problems, they may struggle to pay rent on time. One of its largest tenants, Steward Healthcare, which is responsible for approximately 20% of the REIT's revenue as of Q3, is chronically unable to pay its full monthly rent, and is behind on its payments to the tune of $50 million. The company plans to write off hundreds of millions of its rent receivables in its Q4 earnings report. That's a bad sign.
Finally, if it can't generate enough cash to pay out to investors, it'll need to slash the dividend again. In 2023, it cut its payment considerably, but more could be on the way. There isn't any hope in sight, either. With tightly constrained resources and little in the way of surging demand for hospital floor space, this business may not recover from its downward spiral. Don't buy this stock.
Consider buying Pfizer
Pfizer's (PFE -0.33%) story is somewhat the opposite of Medical Properties Trust. Its stock soared due to its development and sale of the Comirnaty vaccination and Paxlovid antiviral pill for preventing and treating coronavirus infections. But the company's temporarily-bloated top line is deflating from its peak of just over $100 billion in 2022.
In essence, Pfizer became a victim of its own success, and when the scramble for tools to fight the pandemic became less intense, it was all but guaranteed to struggle growing.
Pfizer's forward yield is now 6.1%, and its coronavirus windfall is eroding rapidly. Nonetheless, its trailing-12-month sales of $68.5 billion are still much higher than its pre-pandemic haul of $40.9 billion in 2019. Management has a plan to increase that sum by quite a bit by scaling up its competition in oncology over the next six years and beyond.
The first stage of the plan is already in motion. Pfizer recently purchased Seagen, a biotech developing antibody-drug conjugate (ADC) medicines for various cancers, and it aims to acquire additional companies while also upscaling the output of its pipeline by spending more on research and development.
Scaling up will mean increasing its opportunities to grow in the long term. It already has a whopping 31 programs in phase 3 clinical trials, with another 34 in phase 2, so investors can have confidence that the company has a strong roadmap to deliver its dividend for at least the next six to eight years, and likely beyond.
Though its payout ratio is relatively high at the moment, at 89% of its annual earnings, returning to growth will ameliorate the situation and give Pfizer more headroom to hike its payment once again. Especially for investors who are willing to buy the stock now when it's down and hold it for a long time (during which it'll be able to deliver a steady stream of cash), Pfizer's shares are an opportunity that's ripe for the taking.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
