With a succulent forward dividend yield of more than 15%, it's no surprise that investors are curious about whether to buy shares of Medical Properties Trust, (NYSE: MPW) a business that invests in hospital real estate to rent it out. But as smart investors know, appearances can be deceiving, and often a high yield equates to high risk.

So is this stock a safe place to park your cash to get some reliable cash flow in return, or is there somewhere better?

The yield is deceptive

There are a number of reasons it is not reasonable to expect that Medical Properties Trust will be a stable dividend stock, starting with the fact that it cut its dividend last year. The reason for that cut was, quite simply, that the company's financial position is deteriorating, and that it is likely to get worse.

Real estate investment trusts (REITs) borrow money for the purpose of buying real estate. Then, ideally, they very slowly recoup their borrowing costs (as well as the loan's principal) by leasing the floorspace to tenants that pay a higher monthly rent than the total payment that the REIT owes to its creditors. The difference between the monthly rental income and the debt payments constitutes the pool of money that the company can then use to cover its operating expenses and provisions for future investments, with the remainder of the cash flowing to shareholders as the dividend.

This process has gone awry for Medical Properties. It has a total of $10.1 billion in debt. In the first quarter, its revenue of $271.3 million was larger than its total expenses, including interest, of $222.4 million. But between 2025 and the end of 2027, 62% of its debt load will be due, which means that its repayment costs will soar when it has to refinance that debt.

To make matters much worse, its largest tenant, Steward Health Care, which is responsible for around 20% of its rental revenue, declared bankruptcy in early May. There is no way to square this circle gracefully. So, in keeping with similar actions in the prior quarters, management is opting to sell properties to get cash. Its latest sale of five hospitals in April generated $350 million in cash. In the same period, another sale of a majority equity interest in a few other hospitals produced $1.1 billion.

With fewer rent-bearing properties, the company's income will shrink. With fewer assets, its collateral available to support borrowing more money will also shrink. And without top- and bottom-line growth, there can be no way for its dividend to grow, and continuing to pay it, even at its recently reduced rate, is already a questionable proposition.

There are safer options

As you may have guessed, Medical Properties is not a safe dividend stock at all. Its share price will likely drop more, which will drive its dividend yield higher, at least until the dividend itself is cut again, which may well happen. People who invest in it now will probably not get the passive income they expect, and they will probably not be able to liquidate their investment for anything close to what they put in if they wait too long.

For investors seeking safe dividend income, it is a better idea to look for lower-yielding options. Aside from that, look for stocks with a payout ratio that's well beneath 70% of net income, which indicates that the company's earnings are significantly more than the amount it plans to pay out in dividends. Even more important than that is to find a business that is actually increasing its revenue and earnings, rather than selling off its productive assets to keep the lights on.

As unsatisfying as it may be due to the much lower yield, opting for a heavily diversified mix of companies contained in an exchange-traded fund (ETF) like the SPDR Portfolio S&P 500 High Dividend ETF is a much safer choice. A yield of 4.6% annually might not seem like it'll be enough cash flow, but at least you can count on it not getting cut at an inopportune moment.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Is Medical Properties Trust a Safe Dividend Stock in 2024? was originally published by The Motley Fool