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

A excessive dividend yield will be alluring. Nevertheless, a sky-high payout is usually a warning signal that the market believes the corporate will not be capable to preserve its dividend for much longer. Due to that, buyers must be cautious when shopping for shares with massive dividend yields.

Take Annaly Capital Administration (NYSE: NLY) and Medical Properties Belief (NYSE: MPW). The true property funding trusts (REITs) presently provide double-digit yields. These big-time payouts are probably too good to be true. This is why buyers should not fall for them.

Seemingly on the chopping board once more

Annaly Capital Administration presently yields greater than 13%, about 10x the S&P 500‘s dividend yield. The mortgage REIT can presently afford its monster dividend. It recorded $0.68 per share of earnings obtainable for distribution (EAD) in the course of the fourth quarter, masking its $0.65 dividend outlay.

The REIT not too long ago declared its subsequent dividend cost, sustaining the $0.65 per-share degree for the primary quarter. That is not a shock. The corporate’s CEO David Finkelstein acknowledged on the fourth-quarter name that the REIT anticipated to earn sufficient to cowl the dividend within the present quarter.

Nevertheless, the dividend’s future past that cost stays unsure. One issue driving that view is that Annaly tightened its return expectations because of the present market situations. These market situations have induced its EAD to fall from $0.89 per share on the finish of 2023 to a low of $0.66 per share within the third quarter of 2023.

That decline has already induced the REIT to chop its dividend early final 12 months, from $0.88 per share to its present degree. An extra deterioration in its EAD would probably pressure Annaly to chop its dividend once more, which it has executed many instances over time:

NLY Dividend Chart

NLY Dividend Chart

NLY Dividend information by YCharts.

Finkelstein appeared to go away the door open on one other dividend lower this 12 months. He acknowledged on the fourth-quarter name that whereas administration’s view on the time was to not suggest a dividend adjustment to the Board of Administrators, they’d “see how issues progress all through the remainder of the 12 months.” If the corporate’s earnings fall any additional, it’d want one other downward adjustment within the dividend cost.

Nonetheless not wholesome

Medical Properties Belief presently yields round 15%. The hospital-focused healthcare REIT has already slashed its dividend as soon as up to now 12 months. Final August, it up to date its capital allocation technique, which included chopping its quarterly dividend from $0.29 to $0.15 per share. That transfer higher aligned the payout with its adjusted funds from operations (FFO) following a string of asset gross sales.

The REIT wanted to promote properties to repay debt, which it could not refinance at a sexy fee resulting from surging rates of interest and tenant troubles. It has been working instantly with two tenants to assist them get again on a firmer monetary basis. Sadly, whereas one tenant has lastly resumed paying lease, one other solely pays a few of what it owes the REIT. Due to that and its balance-sheet points, Medical Properties Belief plans to promote extra belongings.

The hospital proprietor’s continued points may trigger it to chop its dividend once more. CEO Ed Aldag famous on the fourth-quarter name that sustaining the corporate’s present dividend degree is not depending on its tenant resuming lease because it has a cushion that is large enough to cowl its payout. Nevertheless, it is contingent on closing a few of the transactions it is pursuing to spice up liquidity. If the corporate cannot shut these offers, it’d lower or droop its dividend to retain extra money for debt discount.

Not sustainable revenue shares

Annaly Capital Administration and Medical Properties Belief would possibly provide engaging yields however sadly, they do not look sustainable. Due to that, income-focused buyers ought to keep away from these REITs for now since one other spherical of cuts appears to be coming quickly.

Do you have to make investments $1,000 in Annaly Capital Administration proper now?

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Matt DiLallo has positions in Annaly Capital Administration and Medical Properties Belief. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.

Do not Fall for These 2 Dividend Shares: Cuts Are Coming was initially printed by The Motley Idiot

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