Here's Why I Wouldn't Touch Medical Properties Trust With a 10‑Foot Pole

Medical Properties Trust (NYSE: MPT) is a real estate investment trust (REIT) that owns healthcare properties providing necessary services. Hospitals account for 60% of its revenue. That's the good news and why many investors will likely find the stock's 6.6% yield highly compelling. There's just one problem: The yield is that high for a reason.

The yield is way out of line

The S&P 500 index (SNPINDEX: ^GSPC) has a yield of about 1.2%. The average REIT has a yield of 3.8%. So, when you see a REIT backed by essential properties with a 6.6% yield, you need to ask yourself why the yield is so high. In this situation, the answer is that Medical Properties Trust cut its dividend.

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The dividend wasn't cut just once. The company cut it twice, with the second cut occurring after management had begun a turnaround effort. Obviously, the first turnaround plan didn't work out as well as hoped, and the shares have fallen about 75% during the past five years. The big problem for Medical Properties Trust was that it took on too much debt. When some tenants had trouble paying rent, there wasn't enough muscle on the balance sheet to handle the hit.

To be fair, the dividend was recently increased, which suggests the story is improving. Indeed, the company's debt levels have been trending down, so the dividend cuts clearly provided management with much-needed breathing room.

However, Medical Properties Trust's leverage is still quite high relative to other REITs with attractive dividend yields, like Realty Income and W.P. Carey, which both yield about 4.9% today. And while W.P. Carey also had a dividend cut in its recent past, Realty Income has increased its dividend annually for three decades and counting. That said, W.P. Carey's dividend cut followed a strategic decision to exit the office property sector, costing the company a significant stream of revenue. The dividend was increased the very next quarter and it has been increased each quarter since.

Balancing risk and reward

It is entirely possible that Medical Properties Trust has turned a corner, and the future will look increasingly bright. However, given the dividend history, I'm leery about the future for the shares of a company that still is highly leveraged. Every investment requires you to compare risk against reward. It seems to me there are high-yield stocks with better risk/reward profiles than Medical Properties Trust right now. Two stocks that I suggest you consider are Realty Income and W.P. Carey. Their yields aren't as high, but their dividends appear to be backed by much stronger businesses.

Reuben Gregg Brewer has positions in Realty Income and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.