A double-digit dividend yield is typically a red flag. It suggests investors don’t believe the payout is on solid ground due to the company’s financial troubles. More often than not, stocks with double-digit yields end up cutting or suspending their dividends.
However, that’s not always the case. Some companies can navigate their rough patches without cutting their payouts. NextEra Energy Partners (NYSE: NEP) and Medical Properties Trust (NYSE: MPW) believe they can maintain their big-time dividends. If they can, investors stand to generate lots of income. Here’s a look at what drives those views and what could go wrong.
Operating in low-power mode
NextEra Energy Partners’ dividend currently yields more than 10%. At that rate, it could turn a $1,000 investment into over $100 of annual dividend income. The renewable energy producer backs that payout with relatively stable cash flow produced by selling power to utilities and large corporate buyers under long-term, fixed-rate contracts.
The company expects to continue increasing its big-time payout. It’s aiming to deliver 5% to 8% annual dividend growth through at least 2026, with a goal of 6% yearly increases. NextEra Energy Partners expects to deliver that growth by repowering existing wind farms (replacing legacy turbines with larger, more powerful ones). These high-return projects should increase its income for a modest investment.
However, there are a few caveats. NextEra Energy Partners expects its dividend payout ratio to be in the mid-90s, which leaves little room for error. Further, that growth rate is a deceleration from its initial plan of delivering 12% to 15% annual dividend growth through 2026.
Higher interest rates made it challenging to finance the acquisitions required to achieve that higher growth rate, especially given the company’s need to buy out convertible equity portfolio financings (CEPFs) it used to make acquisitions in the past.
NextEra Energy Partners is addressing those CEPF buyouts by selling off its natural gas pipeline assets. It sold its STX Midstream portfolio for nearly $1.9 billion last year, which will fund the buyouts of the associated STX Midstream CEPF and its NEP Renewables II CEPF that matures next year. The company plans to sell its Meade pipeline business next year to fund additional CEPF buyouts.
If NextEra Energy Partners can execute its strategy and interest rates finally start falling, it should be able to continue increasing its dividend. However, if it faces more challenges, it might need to cut or suspend its dividend to retain additional cash to shore up its financial situation.
Getting healthier
Medical Properties Trust currently yields around 12%. The hospital-focused REIT has struggled due to tenant issues and balance sheet woes. It has already cut its dividend once to retain more cash for debt reduction.
The healthcare REIT has taken several additional steps to address those issues. It’s working to sell hospitals, including those attached to troubled tenants. Those deals have brought in cash to help it repay maturing debt that it couldn’t refinance at acceptable terms. The REIT was also recently able to refinance some debt, extending its maturity by nearly a decade.
Its recent deals have boosted its liquidity by $2.4 billion, exceeding its 2024 target of $2 billion. And that number should continue to grow. Medical Properties Trust is working to find new tenants for all the properties currently leased to its top tenant, which recently went bankrupt. It could end up selling some of those properties to the new operators. It’s also working to sell its interest in a managed care business related to another troubled tenant, which could bring in additional cash.
Medical Properties needs to continue strengthening its portfolio and balance sheet. If it can successfully replace its top tenant with new operators, those properties will resume generating full rental income. However, the REIT might need to cut its payout again if it can’t find high-quality operators to assume existing lease rates or other tenants run into trouble.
High-risk, high-reward income streams
NextEra Energy Partners and Medical Properties Trust offer investors high-yielding income streams and upside potential. However, due to their financial troubles, they also have higher risk profiles. Because of that, they’re best for investors willing to take on more risk for the prospect of earning a higher reward.
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Matt DiLallo has positions in Medical Properties Trust and NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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