Companies with high dividend yields may look attractive, but there’s more to income stocks than those with above-average yields. Any company’s payouts are at risk without supporting a strong business. That’s why choosing the right dividend stock requires looking beyond yield and into the company’s fundamentals.
Let’s illustrate it with two examples: Pfizer (NYSE: PFE )And Clinical Properties Foundation (NYSE: MPW ). While both have attractive yields, the former is a worthy investment, but the latter, not so much. Here’s why.
High-Yield Stock to Buy: Pfizer
The drugmaker’s stock is not popular in the market right now, and the stock has lagged the market significantly over the past two years. Meanwhile, stocks Dividend yield The highest, as of this writing, is 5.7%. Despite Pfizer’s problems, the company can maintain its dividend plan.
To be fair, Pfizer’s financial results are relatively poor compared to what it delivered in 2021 and 2022 — both years thanks to its work on the coronavirus side of its sales. Nevertheless, its top line has penetrated more than pre-pandemic levels, a very encouraging sign that points to secular growth in the business.
Pfizer’s Covid-19 drugs will eventually stop affecting its results. Also, the company’s research and development costs (which are far higher than pre-pandemic levels) have seen no reduction, which has seen operating and net income fall below pre-Covid levels.
Hence, there is a strong possibility of a full range of products in the pipeline, which will help the company return to profitable growth. Currently, Pfizer has more than 100 projects in its pipeline. But two areas where the company is focusing its research efforts, and which deserve special mention, are in the weight loss space and oncology.
The lucrative GLP-1 weight loss industry is growing rapidly. Pfizer’s candidate, oral danuglipron, A recent phase 2 study did well.
Then, there are the company’s efforts in oncology. Pfizer buys oncologist Seagan for $43 billion CEO Albert Porla said of the acquisition: “We’re not buying the golden eggs, we’re buying the goose that lays the golden eggs.” Seagan had several approved cancer drugs and a deep pipeline, but it was a much smaller company than Pfizer, with less funding and a smaller footprint in the industry. Now that they are a separate company, Pfizer should become a more important player in the oncology space.
So, despite a poor showing over the last year or so, the company’s underlying business has great prospects. Pfizer’s dividend should be safe. It has increased its payouts by 17% over the past five years. Pfizer is a reliable, high-yielding dividend stock.
High yield stock to avoid: Medical Properties Trust
Medical Properties Trust (MPT), a healthcare-focused real estate investment trust (REIT), has been crushed since early 2023. The company’s revenue, earnings and share price have all moved in the wrong direction.
Unlike in the case of Pfizer, this is not because MPT has fallen from incredible heights. Here is the reason. One of its key tenants, Steward Healthcare, had trouble paying rent. Stewart officially filed for bankruptcy in May.
As a result of this issue, MPT has no choice but to cut its dividend. It has done so twice since mid-2023. MPT’s yield stands at 5.56%. However, dividend seekers hate payout cuts, so MPT may not be the best choice right now.
Some would argue that the company is on the verge of putting its stewardship problems in the rearview mirror. True enough. MPT recently reached agreements to place new tenants in 15 of the 23 hospitals previously operated by Stewart Healthcare. The average lease term is about 18 years.
But according to the agreement, these new tenants won’t start paying rent until the first quarter of 2025, and even then, they’ll pay only half of the lease agreement by the end of next year. They will gradually improve things until they reach the total in the fourth quarter of 2026.
It’s a win for MPT: it gets rid of its troubled tenant and replaces it with four new ones (higher diversification) that (unless financial problems come with them) will pay regular and predictable amounts until 2042 on average. However, MPT still has work to do to fix its business. Some of Steward’s former facilities, including some hospitals under construction, have yet to be settled.
Even so, given the issues it has been facing recently, I would recommend staying away from the stock, at least for now. Yes, MPT is improving its business, but it is best to see how things pan out until it proves that it is officially back by consistently delivering good results.
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Prosper Jr. Bagini No position in any of the shares mentioned. The Motley Fool has posts and recommends Pfizer. A motley fool Disclosure Policy.
Buy 1 ultra-high-yield healthcare stock handle and avoid 1 Originally Posted by The Motley Fool
2024-09-25 19:35:00