Don’t fall for these two dividend stocks: cuts are coming

By | March 28, 2024

A high dividend yield can be attractive. However, a sky-high payout is often a warning sign that the market thinks the company won’t be able to maintain its dividend for much longer. Therefore, investors should be careful when purchasing stocks with high dividend yields.

To take Annaly Capital Management (NYSE:NLY) And Trust medical properties (NYSE: MPW). The real estate investment trusts (REITs) are currently offering double-digit returns. Those big payouts are probably too good to be true. Here’s why investors shouldn’t fall for it.

Probably back on the cutting board

Annaly Capital Management currently yields over 13%, about 10x as much S&P500‘S dividend yield. The Mortgage REIT can currently afford its monster dividend. It posted $0.68 per share in available-at-distribution (EAD) earnings in the fourth quarter, covering dividend expenses of $0.65.

The REIT recently announced its next dividend payment, maintaining the $0.65 per share level for the first quarter. That’s no surprise. The company’s CEO David Finkelstein said this on the website fourth quarter call that the REIT expected to earn enough to cover the dividend in the current quarter.

However, the future of the dividend after this payment remains uncertain. One factor driving this view is that Annaly has tightened its return expectations due to current market conditions. These market conditions have caused the EAD to fall from $0.89 per share at the end of 2023 to a low of $0.66 per share in the third quarter of 2023.

That decline has already led to the REIT cutting its dividend early last year, from $0.88 per share to current levels. A further deterioration in the EAD would likely force Annaly to cut its dividend again, which it has done many times over the years:

NLY Dividend Chart

NLY Dividend Chart

NLY Dividend Data According to YCharts.

Finkelstein seemed to leave the door open for another dividend cut this year. He stated on the fourth quarter call that while management’s view at the time was not to recommend a dividend adjustment to the Board, they would “see how things develop over the remainder of the year.” If the company’s earnings decline further, it may need another downward adjustment to its dividend payout.

Still not healthy

Medical Properties Trust currently yields about 15%. The hospital-oriented healthcare REIT has already cut its dividend once in the past year. Last August, the company updated its capital allocation strategy, including cutting its quarterly dividend from $0.29 to $0.15 per share. This step brought the disbursement more in line with the adjusted funds from operations (FFO) after a series of asset sales.

The REIT had to sell properties to repay debt, which they were unable to refinance at an attractive rate due to rising interest rates and tenant issues. We worked directly with two tenants to help them regain a firmer financial foundation. Unfortunately, while one tenant has finally resumed renting, another tenant is only paying a portion of what is owed to the REIT. Because of that and its balance sheet issues, Medical Properties Trust plans to sell more assets.

The hospital owner’s ongoing problems could force the dividend to be cut again. CEO Ed Aldag commented fourth quarter call that maintaining the company’s current dividend level is not dependent on the tenant resuming rent because it has a buffer large enough to cover the payout. However, it is dependent on closing some of the trades it is pursuing to increase liquidity. If the company can’t close these deals, it could cut or suspend its dividend to preserve additional cash for debt reduction.

No sustainable income shares

Annaly Capital Management and Medical Properties Trust may offer attractive returns, but unfortunately they don’t look sustainable. Therefore, income-oriented investors should avoid these REITs for now as another round of cuts appears to be coming soon.

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Matt DiLallo holds positions at Annaly Capital Management and Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Don’t Fall for These Two Dividend Stocks: Cuts are originally published by The Motley Fool

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