Devon Energy(NYSE: DVN) and Medical Properties Trust(NYSE: MPW) don't compete against each other in the marketplace. Devon is in the oil and gas production business, while Medical Properties Trust leases properties to hospital operators. However, they do compete in one sense -- for income investors' money.
Both companies offer exceptionally high dividend yields that many income investors find tempting. But which is the better ultra-high-yield dividend stock? Here's how the two stack up against each other.
Dividend yield
Medical Properties Trust clearly has an advantage over Devon on one important front. The healthcare real estate investment trust (REIT) pays a dividend that yields a whopping 15.5%. Devon's dividend yield of 10.5% is high, but not nearly as high as Medical Properties Trust's.
The bad news for Medical Properties Trust is that its ultra-high-dividend yield is due in large part to the stock's steep decline. Over the last 12 months, the company's shares have plummeted more than 60%.
Devon stock has fallen, as well. However, its drop of more than 20% doesn't look nearly as scary as Medical Properties Trust's massive plunge.
Dividend security
It's harder to determine which stock's dividend is more secure. Investors have some reasons to be concerned about the dividend payout for both companies.
Devon's dividend consists of two parts -- a fixed component and a variable component. The variable component is based on the company's excess free cash flow, which can fluctuate with changes in oil prices.
Devon has paid a dividend for 30 consecutive years. However, it recently reduced its variable dividend payout as a result of lower oil prices.
On the other hand, Medical Properties Trust hasn't cut its dividend. The REIT has increased its dividend for eight consecutive years.
That streak now appears to be in jeopardy, though. One of Medical Properties Trust's top tenants, Prospect Medical, hasn't paid its full rent so far this year.
There are some reasons not to worry about an imminent dividend cut from Medical Properties Trust. The company expects to recover some rent payments from Prospect this year, and the financial outlook for its other tenants appears to be improving. Medical Properties Trust's guidance for 2023 should give it sufficient adjusted funds from operations to cover the dividend at current levels.
The bottom line is that there's some uncertainty for the dividends of both Devon and Medical Properties Trust. However, even if the companies are forced to reduce their dividend payouts, I think both would still offer really attractive dividend yields.
Growth prospects
As you'd expect, Devon's growth prospects hinge largely on the demand for oil. The company projects it will increase production by at least 9% this year. Devon also has around 12 years of what it calls "low-risk development inventory."
Even with the shift from fossil fuels to renewable energy sources, the International Energy Administration projects that the demand for oil will increase over the next several decades, based on countries' stated policies. Devon's growth prospects will likely diminish over time but should still be solid over the next few years.
High interest rates are currently holding back Medical Properties Trust's growth plans. But CEO Ed Aldag stated in the healthcare REIT's fourth-quarter conference call, "We continue to see tremendous opportunities and are prepared to act on them as soon as the world settles down on the new normal for interest rates."
My view is that Devon has better near-term growth prospects. Over the longer term, though, I think that Medical Properties Trust's growth prospects should be stronger.
Valuation
There's nearly a tie between these two ultra-high-yield dividend stocks when it comes to valuation using one popular metric. Devon's shares currently trade at 5.7 times expected earnings. Medical Properties Trust's forward earnings multiple stands at 5.2.
It's a different story, however, looking at another metric. Many investors view valuation metrics based on enterprise value as more useful than those based on earnings. Devon's enterprise-value-to-revenue ratio is 3.5, much lower than Medical Properties Trust's multiple of nearly 9.7. This difference reflects the fact that Medical Properties Trust has a lot more debt and a lot less cash than Devon does.
And the winner is...
I own both of these ultra-high-yield dividend stocks. But I have a relatively high tolerance for risk. Investors who are risk-averse will probably be better off avoiding both Devon and Medical Properties Trust.
Income investors who aren't afraid of taking on risk will find plenty to like about both stocks. My hunch is that Devon will deliver higher total returns this year. Over the next few years, though, I expect Medical Properties Trust to come out on top. I think it's the better pick for aggressive, yet patient, investors.
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Keith Speights has positions in Devon Energy and Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
