When you're buying income stocks, a company's underlying business is arguably still the most crucial factor to consider, even more than the dividend yield. Corporations with high yields may look attractive, but sometimes these are unsustainable. So it might be best to opt for stocks with lower yields but more robust operations.
Which dividend-paying companies should investors put their money in this year, and which ones should they avoid? Let's consider one corporation in each category: Medtronic (NYSE: MDT) and Medical Properties Trust (NYSE: MPW). The former may have a much lower yield, but it also looks more attractive right now as an income stock.
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Medtronic is a prominent medical device company. The healthcare leader is impressive in the number of devices it develops and markets -- there are dozens of them across four main therapeutic areas -- and its large geographical footprint spans 150 countries. Medtronic routinely generates steady revenue and earnings, too.
Though the company's top-line growth hasn't been impressive in the past few years, there are reasons to be optimistic. Let's consider two.
First, Medtronic's diabetes care unit, the most impressive in terms of sales growth, is gaining prominence and still has plenty of room to grow. Medtronic develops innovative insulin pumps and pens, continuous glucose monitoring devices, and more. Given that there are half a billion adults worldwide with diabetes, the majority of whom don't have access to cutting-edge technologies like CGM, there is plenty of whitespace here for Medtronic.
Second, the healthcare giant is developing a robotic-assisted surgery (RAS) device, the Hugo system. This gadget is currently being tested in the U.S., although it is already in use in several other countries. The RAS market is yet another one with plenty of growth potential, considering the benefits of the minimally invasive surgeries that robot systems allow physicians to perform.
Beyond that, Medtronic should benefit from important long-term trends, including an aging population. So, relatively slow revenue growth in the past few years is hardly a reason to avoid the stock, particularly for those looking at reliable blue chip dividend companies. That group includes Medtronic.
The healthcare leader is on a streak of 47 consecutive years of payout increases. It will likely become a Dividend King within a few years. The company's forward yield currently sits at 3.20%, and Medtronic's cash payout ratio is at a manageable 70.5%. Medtronic might not be the most exciting stock on the market, but it can bring some stability and consistently growing income to anyone's portfolio.
Medical Properties Trust is a healthcare-focused real estate investment trust (REIT). These types of companies are a favorite target of dividend investors, since REITs are legally required to distribute at least 90% of their taxable income as dividends.
However, if a REIT encounters headwinds that harm its financial results, it might have no choice but to slash its dividends. That's what Medical Properties Trust did not too long ago after one of its largest tenants stopped paying rent, something that led to a dip in its financial performance.
In fact, Medical Properties Trust decreased its dividends twice in less than a year. Its troubled tenant was the hospital chain Steward Healthcare, which has declared bankruptcy. The good news is that Medical Properties Trust is working hard to fix this problem. The company has reached deals with other tenants for most of the facilities previously occupied by Steward Healthcare.
These new tenants are supposed to start paying rent, or at least part of the full amount, in the first quarter of this year. They will increase their payment until it reaches the full amount in the fourth quarter of 2026. In other good news, these new renters have an average lease term of 18 years.
Still, even with the company making strides in the right direction, there remains plenty of risk. Medical Properties Trust's forward yield of 7.82% might look attractive, but given the issues it has faced recently, it is best to avoid the stock for now. There are far better -- and safer -- income options on the market.
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*Stock Advisor returns as of January 21, 2025
Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.