Avoidable Dividend-Yielding Shares that Income-Oriented Investors Ought to Steer Clear Of
Avoidable Dividend-Yielding Shares that Income-Oriented Investors Ought to Steer Clear Of
The financial market houses numerous beneficial dividend-paying stocks. However, it also accommodates companies that pay dividends but may not spark interest among income-focused investors. The target for income hunters is the former, while the latter might not, or shouldn't, entice them for this specific purpose.
Distinguishing between these categories for a dividend-payout company might not always be straightforward. Let's scrutinize two such stocks that consistently distribute dividends but do not present themselves as top dividend stocks: Medical Properties Trust (MPW -0.13%) and Walgreens Boots Alliance (WBA 1.55%).
1. Medical Properties Trust
Medical Properties Trust (MPT), a real estate investment trust (REIT) with a focus on the healthcare sector, serves as a powerful reminder for dividend investors not to solely pursue high yields. The company's projected yield of 6.91% is significantly higher than the S&P 500's (SNPINDEX: ^GSPC) average of 1.32%.
However, there is more to this story. In the past, MPT's yield was substantially higher until the company reduced its payouts on two consecutive occasions. What resulted in this situation?
The company experienced difficulties with one of its major tenants, Steward Healthcare, who struggled to meet rental obligations. REITs are legally bound to distribute at least 90% of their taxable income as dividends, so MPT could not halt its payouts entirely. However, investors expect dividends to grow, not decline. Steward Healthcare, MPT's financially-strained tenant, filed for bankruptcy, and the healthcare REIT devised a strategy to navigate past this significant setback.
MPT has secured tenants for 15 of the 23 hospitals formerly owned by Steward Healthcare. The new tenants will not commence paying rent until the following year, and even then, they will only pay the full amount by the end of Q4 2026.
Despite these challenges, this is beneficial for MPT as it adds diversity, making it less likely to incur substantial losses from a single tenant defaulting on rent payments. Moreover, these new occupants have signed lease terms averaging 18 years, providing MPT with a predictable income source for the following two decades.
The company is heading in the right direction, but it is premature to celebrate. MPT remains a somewhat high-risk income stock given its recent history. I would encourage dividend hunters to steer clear of this company at present.
2. Walgreens Boots Alliance
MPT was not the only prominent dividend stock to trim its payouts in the recent past. Retail pharmacy titan Walgreens followed suit. In January, Walgreens announced a 48% reduction in its dividend.
This move was hardly surprising given the company's slow revenue growth and consistent net losses for several years. Walgreens' fourth quarter 2024, ending on Aug. 31, was no exception. Its revenue gained 6% year over year to $37.5 billion.
However, on the income side, Walgreens' loss per share of $3.48 was far more severe than the net loss per share of $0.21 reported in the prior year. Walgreens has attributed its poor performance to the challenging U.S. retail environment. Amazon (and others) is competing against the company, with its Amazon pharmacy unit launching in late 2020.
Amazon, with its vast army of loyal Prime members, has been a one-stop-shop for everything from groceries to books and electronic purchases, offering free rapid delivery options for medicines to its members. For many patients, it is more convenient to bundle purchases through Amazon.
Walgreens' competition is not helping the company's situation further.
Does Walgreens have any hope? The company recently announced plans to shut down 1,200 stores over the next three years to reduce costs and improve efficiency. Additionally, Walgreens has been expanding its footprint in the primary care market, which could introduce some much-needed diversity if the retail pharmacy segment continues to face competition.
Will these initiatives bear fruit? Perhaps, but for now, Walgreens' recent dividend reduction and persistent financial underperformances make it unappealing to dividend investors, despite its sky-high forward dividend yield of 10.7%.
- Despite its high projected dividend yield of 6.91%, Medical Properties Trust (MPT) has reduced its payouts in the past due to financial challenges with a major tenant. This incident serves as a reminder for dividend investors not to solely focus on high yields, as the sustainability and growth of dividends are also important considerations.
- In the quest for high yields, some investors might be tempted by Walgreens Boots Alliance's sky-high forward dividend yield of 10.7%. However, the company's consistent net losses and challenging retail environment, coupled with intense competition from Amazon and others, might make it a risky investment for income seekers. Investors should carefully consider these factors before investing in Walgreens for dividends.
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