Daily Stock Pick: August 5th, 2022

Stocks slipped lower this morning after job growth data came in much higher than anticipated. The labor market added 528,000 jobs in July, far surpassing Wall Street’s expectation of a 258,000 increase. Strength in the labor market supports the Federal Reserve’s case for continued aggressiveness against inflation, which could put a damper on any hopes for a market recovery this year.  

“All the jobs lost during the pandemic have now been regained. But while that is positive news, markets will take today’s number as a timely reminder that there is significantly more Fed hiking still to come. Rates are going above 4%, today’s numbers should put to bed any doubters,” said Seema Shah, chief global strategist at Principal Global Investors. 

Some on Wall Street are skeptical that the current rally can sustain much longer, such as the chief multi-asset strategist at HSBC Bank, who called the comeback “wishful thinking.”  Today’s featured ticker is a top choice from an asset class, offering a unique risk/reward profile that doesn’t correlate with stocks or bonds. This ticker also boasts one of the highest yields in its class, and there’s still room for dividend growth in the back half of the year.    

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REITs offer a unique risk/reward profile that doesn’t always perfectly correlate with stocks or bonds because real estate is an asset class that’s not directly tied to traditional markets. In many situations, REITs can bolster your portfolio when markets plunge.

For example, during the dot-com recession,  REITs were up every single year from 2000 to 2002. By contrast, stocks were down every one of those years. Historical returns aren’t bad, either. Over the past 20 years, REIT’s total return performance has beaten the performance of the S&P 500 as well as the Russell 1000 (large-cap stocks), Russell 2000 (small-cap stocks), and Bloomberg Barclays (U.S. aggregate bond).

REITs are also not required to pay federal taxes so long as they distribute at least 90% of their profits as dividends, often leading to sizeable payouts, which makes an investment in a quality REIT a relatively steady source of income. According to NAREIT data, equity REIT dividend yields averaged approximately 2.6% in 2021, or more than twice the 1.2% yield of the S&P 500.  

REITs have taken a hit in 2022 due to fears of rising interest rates. Still, for some tickers, the sell-off looks overdone, creating opportunities for investors looking to diversify and benefit from the steady income. 

Medical Properties Trust (MPW)  is a healthcare REIT that invests in hospitals; it owns 385 hospital properties representing 42,000 licensed beds across nine countries. The company leases facilities to 50 hospital systems and ranks as the second largest owner of hospital beds in the U.S. Hospital systems enter into sale-leaseback arrangements with the REIT to monetize real estate assets and reduce operating costs. It invests in facilities subject to triple-net leases, meaning the renter is responsible for all property taxes and insurance costs, reducing risk for the trust.  

MPW has delivered 30% annual asset growth and 8% annual FFO per share gains over the past decade. That has helped a string of nine consecutive years of dividend increases, with growth averaging a modest 4% annually.   MPW comes with a solid history of adjusted funds from operations (AFFO) growth while steadily decreasing the payout ratio. Since its last increase, the FFO payout ratio decreased from 82% to 78% and remains well below market peers.   

The stock has delivered a 356% total return over the past decade, outperforming both the Health Care Index and the  MSCI U.S. REIT Index. At 7.44%, MPW boasts the second highest dividend yield in the sector behind Omega Health (OHI). Between the increase in its dividend coverage and expected revenue growth, we’ll likely see its streak of growing payouts continue.

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