Which high-yielding dividend is the safer option for investors?

By | March 30, 2024

Investing in high-yielding dividend stocks can be risky. The yield is usually high for a reason, but usually not good. And the higher the return, the more hesitant investors often are to invest in the stock, fearing that the payoff won’t last long.. Two stocks with incredibly high returns at the moment Altria Group (NYSE:MO)the tobacco giant that pays investors 9%, and Reliance on medical properties (NYSE: MPW)a real estate investment trust (REIT) with a monstrous 15% yield.

Below, I’ll make a case for each of these dividend stocks, highlighting both their strengths and weaknesses, and which may be the safer option for you.

The case for Altria Group

Dividend investors value stocks with a long track record of success and paying dividends. Altria falls squarely into that category: the company has not only been paying dividends for decades, but it’s also increasing them. It’s part of an exclusive club of dividend stocks known as Dividend Kings, companies that have been increasing their payouts for at least 50 years in a row.

The big blow to Altria is that consumers are moving away from tobacco products for health reasons, meaning its future growth and ability to pay a dividend are in doubt. However, the company is moving to offering smoke-free products. The oral tobacco segment, which includes smokeless products, generated $2.7 billion in revenue in 2023, accounting for nearly 11% of Altria’s revenue.

And Altria does not have to immediately switch to smoke-free products. The transition for consumers will undoubtedly take time. Cigarette demand remains relatively resilient. While tobacco revenues fell to $21.8 billion last year, the net effect after excise taxes was a decline of only 1.6%. The company’s adjusted diluted earnings per share rose 2.3% last year to $4.95. And while the stock’s payout ratio remains a bit high at 84% of earnings, it does suggest the dividend is sustainable.

The case for Medical Properties Trust

Medical Properties Trust (MPT) has struggled to win over investors in recent years, and that’s a big reason why its returns are so high. In the past twelve months alone, shares of the healthcare-focused REIT are down 41% (for comparison, Altria is up 7%).

MPT has had problems with tenants, but the company is making efforts to improve its financial situation by divesting hospitals to strengthen its balance sheet. Last year it also cut its quarterly dividend payment from $0.29 to $0.15. By doing this, MPT made it easier for the company to maintain that payout.

Investors may be turned off by MPT’s financials, and rightly so, as they were terrible last quarter. The REIT reported a loss of $663.9 million for the last three months of 2023 as the company incurred impairment charges and wrote off rent. However, these costs are one-off in nature and MPT should be able to make a profit again in the coming quarters. And with a strategy aimed at adding $2 billion in incremental liquidity this year, the company could be in a much better position by year’s end, depending on how asset sales go.

MPT’s business may not look great, but management is taking steps to improve its balance sheet and liquidity, which could make it a much better buy in the long run.

The decision for most income investors should be simple

As uncertain as Altria’s business’s future may seem, they are in much better shape today than MPT. A company that sells assets and focuses on liquidity shows all the signs of a struggling business, and that’s not something most income investors want to worry about. While there could be many benefits to MPT if the turnaround plan is successful, there are also enormous risks involved.

In terms of safety, Altria is clearly the safer option. However, it also comes with its own risks. If you’re a risk-averse investor, you might want to avoid both of these stocks and instead pursue lower-yielding stocks with safer payouts.

Should You Invest $1,000 in Altria Group Now?

Consider the following before purchasing shares in Altria Group:

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David Jagielski 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.

Altria Stock vs. Medical Properties Trust: Which High-Yield Dividend Is the Safer Option for Investors? was originally published by The Motley Fool

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