3 under-the-radar dividend stocks with yields of 5% or more

Most investors think they have to give up high-yielding dividends for long-term growth opportunities. But as you’ll see with these three under-the-radar stocks, that’s simply not true.

REP properties (REP -2.21%), Rhythm Capital (RITM -1.70%)and Medical Properties Trust (MPW -2.98%) all pay dividend yields of 5% or more and present long-term growth opportunities. Here’s a closer look at the stocks that three Motley Fool contributors consider to be excellent income stocks to hold for the long term.

EPR dividend yield given by Y-Charts

Let the party begin

Liz Brumer Smith (EPR properties): It’s no surprise that the stock prices of EPR Properties, the premier entertainment real estate investment trust (REIT), which owns just over 350 different entertainment properties across the country, were absolutely crushed. COVID-19 has temporarily closed most entertainment venues.

Cinemas, gaming and dining venues, concert halls, chalets and ski resorts, museums and countless other cultural, arts and entertainment properties have struggled with shutdown mandates and falling demand for more than two years. But fortunately, the demand for experiential activities is back in full force.

The company’s earnings in recent quarters have been exceptional. Its adjusted funds from operations (AFFO), a key financial metric for REITs, was up 94% year-over-year in the second quarter of 2022.

But EPR Properties is not entirely clear. One of its top 10 tenants, Cineworld Group, the parent company of Regal Cinemas, is preparing to file for bankruptcy, which has caused some volatility in its share price lately. However, EPR Properties has more than enough cash to help it weather a hit like this. Not to mention its low debt-to-earnings before tax, interest, amortization and depreciation (EBITDA) ratio of around 5.1 times and a payout ratio of 67% means the company should have no problem maintaining its high yield dividend – which is paid monthly.

The impact of COVID-19 on the entertainment industry has been temporary. Over the long term, I still believe people will want to participate in experiential activities, making EPR Properties a fantastic long-term buy given its high dividend yield of 6.7% today.

A mortgage REIT with low interest rate risk

Mike Price (Rithm Capital): New Residential recently rebranded itself as Rithm Capital as part of a transition to internalize its management team and no longer be externally managed by Fortress Investment Group. Management expects the move to save the mortgage REIT (mREIT) about $60 million a year. For mREITs, any small reduction in operating expenses helps.

Mortgage REITs borrow money and invest in mortgages or mortgage-backed securities (MBS). Typically, the mREIT has a strong balance sheet that allows it to borrow at a low rate and earn the spread on the difference between that low rate and the mortgage rate.

It’s a good business model that generates a lot of cash flow to pay very high dividends in good times. For example, Rithm’s dividend yield is currently over 10%. The problem is when interest rates rise.

Most MREITs focus on long-term investments — they have to because residential mortgages often have terms of 30 years, and basically all of them have terms of at least 15 years. But their funding sources are short-term. This means that when rates rise, they have to refinance at a higher rate while their cash flow stays the same. The spread becomes thinner. This logic led virtually the entire sector to experience a year of decline.

Rithm is not as vulnerable to interest rate risk as its competitors. First, he has $1.6 billion in cash to make new investments or pay down debt if needed. Second, a recent acquisition gave his portfolio exposure to a portfolio of short-term bridge loans with an average rate of 7.8%. Finally, the REIT has a significant investment in Mortgage Servicing Rights (MSRs), which increase in value when interest rates rise.

Rithm manages the mortgage for which it has MSRs, which means it collects payments, maintains escrow accounts to pay property taxes and insurance, and interfaces with borrowers as needed. The lender who holds the mortgages pays him a fee for doing this. When interest rates rise, fewer borrowers refinance their mortgage, which would render the right to service their loan worthless.

Rithm Capital has the same high double-digit dividend yield as many of its competitors, but it may be the only one that can fight higher interest rates, meaning you won’t have to worry about this dividend will be hammered over the next few years.

Specialty medical facilities with a massive dividend yield

Kristi Waterworth (Medical Properties Trust): When buying dividend-paying stocks, many investors prefer to go with companies they have heard of or can at least relate to. This is why things like apartment REITs are so popular: people understand how the apartment business works. But that doesn’t mean there isn’t room for equally stable, but lesser-known REITs like Medical Properties Trust.

Medical Properties Trust specializes in letting properties such as hospitals and other specialist healthcare facilities. These properties have a very specific clientele that performs very specific work and needs facilities tailored to their needs. You can’t just take something like an old supermarket and turn it into a healthcare facility without a lot of work, and that’s where this REIT comes in.

Its tenants know and appreciate that they get industry-specific facilities. This is evident from the growth that Medical Properties Trust has experienced over the past decade. Free cash flow has increased 670.74% since 2012, from $105.3 million to $811.7 million in 2021. This, of course, is largely due to strategic growth across the world. As of June 30, Medical Properties Trust catered to 54 operators across 447 properties in 10 countries.

These earnings and stable tenants enabled Medical Properties Trust to pay a healthy dividend of 7.71% with a payout ratio of 57%. Despite the huge dividend, the payout ratio is low enough that one can reasonably assume that it is sustainable and that the company is using its funds to invest in further expansion.

Medical Properties Trust’s annual dividends have grown from $0.62 per share in 2005 to $1.12 per share in 2021. That’s an 80.65% increase over the past 16 years, and it’s been fairly stable .

My one and only concern about this stock is the debt load it carries. Currently, it holds a total debt of $10.2 billion which is due within the next 10 years, but only $19.7 billion in assets. While that amount isn’t too high to be heavy, if debts get much higher, it could start to affect dividend payouts if rental rates were to drop. However, considering the huge dividend payout that Medical Properties Trust issues, a small dividend cut would still yield an incredible dividend yield.

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