Up Over 40%, Is this Ultra-High-Yield Dividend Stock Still Worth Buying for Passive Income?

Key Points

• EPR Properties' stock has rallied sharply due to falling interest rates and its improved growth prospects.

• The REIT still trades at an attractive valuation, even after its surge.

• Its already solid growth prospects could strengthen as rates continue to fall.

• 10 stocks we like better than EPR Properties ›

EPR Properties (NYSE: EPR) stock has been red-hot over the past year, rallying more than 40%. That surge has driven the real estate investment trust's (REIT) dividend yield down to 5.8%. Here's a look at whether the landlord is still an attractive option for those seeking to generate passive income.

What's driving EPR Properties higher?

EPR Properties is off to a good start this year. The experiential property REIT grew its funds from operations (FFO) as adjusted by 5.3% in the first quarter. It's benefiting from contractual rental increases and its investment to expand its portfolio.

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Last year, EPR Properties invested $263 million in acquisitions and build-to-suit development and redevelopment projects. It acquired an attraction property and invested in several eat-and-play venues and fitness and wellness property development projects. The company's rising earnings are helping drive its share price higher.

Image source: Getty Images.

The other big driver of the REIT's rally is declining interest rates. The Federal Reserve cut rates three times last year by a total of one percentage point. The Fed has signaled that it could make additional rate cuts this year if the inflation rate continues to decline.

Falling interest rates make it cheaper for REITs to borrow money to fund their expansion and refinance existing debt. Lower interest rates also tend to drive up the value of commercial real estate.

The combination of lower interest rates and rising real estate values has helped reduce EPR Properties' cost of capital. A high cost of capital in recent years has limited the REIT's expansion to investments it can fund internally via excess free cash flow after paying dividends and noncore property sales. With its cost of capital improving, EPR Properties could ramp its investment volume this year by externally funding some new investments. The prospects of faster growth have also helped lift shares.

EPR's value proposition

EPR Properties currently expects to generate between $5.00 and $5.16 per share of FFO as adjusted this year. That's an increase from its initial guidance range of $4.94-$5.14 per share. It implies about 4.3% growth from 2024's level at the midpoint.

With its share price above $60 after its rally over the past year, EPR Properties currently trades at about 12 times its FFO. That's still a very reasonable level for a REIT. Many of its peers trade in the 15-to-20-times FFO range.

That low valuation is why EPR Properties currently offers such a high dividend yield at 5.8%. That's a bit above other high-yielding REITs, many of which have yields in the 4% to 5.5% range.

EPR's high-yielding dividend is on a very sustainable foundation. The REIT currently pays $0.295 per share each month in dividends ($3.54 annually), which is 3.5% higher than last year. That gives it a conservative dividend payout ratio of around 70%.

The REIT also has an investment-grade balance sheet with lots of liquidity. EPR also routinely sells noncore assets to enhance its financial flexibility. It's on track to sell $80 million to $120 million of properties this year.

The company's strong financial profile enables it to invest $200 million to $300 million into new property investments each year without needing to tap into external funding sources. At that investment rate, it can grow its FFO as adjusted at a 3% to 4% annual rate. Meanwhile, with its cost of capital significantly improving over the past year, EPR could increase its investment pace if it finds accretive opportunities. It invested $37.7 million in the first quarter and has lined up $148 million of development and redevelopment projects it expects to fund over the next two years.

An ideal passive income investment

Shares of EPR Properties are rising as interest rates fall and its growth prospects improve. While it isn't as cheap as it once was, it still trades at an attractive level compared to other REITs, which is why it has such an enticing dividend yield. With it paying its lucrative dividend each month, it still looks like a great option for those seeking to generate passive income.

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Matt DiLallo has positions in EPR Properties. The Motley Fool has positions in and recommends EPR Properties. The Motley Fool has a disclosure policy.