Don’t Fall for These 2 Dividend Stocks: Cuts Are Coming

A high dividend yield can be alluring. However, a sky-high payout is often a warning sign that the market believes the company won’t be able to maintain its dividend much longer. Because of that, investors need to be careful when buying stocks with big dividend yields.

Take Annaly Capital Management (NYSE: NLY) and Medical Properties Trust (NYSE: MPW). The real estate investment trusts (REITs) currently offer double-digit yields. Those big-time payouts are likely too good to be true. Here’s why investors shouldn’t fall for them.

Likely on the cutting board again

Annaly Capital Management currently yields more than 13%, about 10x the S&P 500‘s dividend yield. The mortgage REIT can currently afford its monster dividend. It recorded $0.68 per share of earnings available for distribution (EAD) during the fourth quarter, covering its $0.65 dividend outlay.

The REIT recently declared its next dividend payment, maintaining the $0.65 per-share level for the first quarter. That’s not a surprise. The company’s CEO David Finkelstein stated on the fourth-quarter call that the REIT expected to earn enough to cover the dividend in the current quarter.

However, the dividend’s future beyond that payment remains uncertain. One factor driving that view is that Annaly tightened its return expectations due to the current market conditions. Those market conditions have caused its 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 caused the REIT to cut its dividend early last year, from $0.88 per share to its current level. A further deterioration in its EAD would likely force Annaly to cut its dividend again, which it has done many times over the years:

NLY Dividend Chart

NLY Dividend data by YCharts.

Finkelstein seemed to leave the door open on 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 of Directors, they would “see how things progress throughout the rest of the year.” If the company’s earnings fall any further, it might need another downward adjustment in the dividend payment.

Still not healthy

Medical Properties Trust currently yields around 15%. The hospital-focused healthcare REIT has already slashed its dividend once in the past year. Last August, it updated its capital allocation strategy, which included cutting its quarterly dividend from $0.29 to $0.15 per share. That move better aligned the payout with its adjusted funds from operations (FFO) following a string of asset sales.

The REIT needed to sell properties to repay debt, which it couldn’t refinance at an attractive rate due to surging interest rates and tenant troubles. It has been working directly with two tenants to help them get back on a firmer financial foundation. Unfortunately, while one tenant has finally resumed paying rent, another only pays some of what it owes the REIT. Because of that and its balance-sheet issues, Medical Properties Trust plans to sell more assets.

The hospital owner’s continued issues could cause it to cut its dividend again. CEO Ed Aldag noted on the fourth-quarter call that maintaining the company’s current dividend level isn’t dependent on its tenant resuming rent since it has a cushion that’s big enough to cover its payout. However, it’s contingent on closing some of the transactions it’s pursuing to boost liquidity. If the company can’t close those deals, it might cut or suspend its dividend to retain additional cash for debt reduction.

Not sustainable income stocks

Annaly Capital Management and Medical Properties Trust might offer enticing yields but unfortunately, they don’t look sustainable. Because of that, income-focused investors should avoid these REITs for now since another round of cuts seems to be coming soon.

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Matt DiLallo has positions in 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 2 Dividend Stocks: Cuts Are Coming was originally published by The Motley Fool