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Philip Morris International Inc(PM-N)

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Better High-Yield Dividend Stock: Medical Properties Trust or Philip Morris International

Motley Fool - Thu Mar 16, 8:45AM CDT

Dividend stocks are normally top-notch safe-haven plays. After all, dividend-paying stocks are frequently held for long periods of time by a large, stable shareholder base due to their appeal as passive-income vehicles.

However, the unfavorable macro environment has managed to weigh on even these central pillars of many well-established portfolios. Speaking to this point, the bellwether Vanguard High Dividend Yield ETF has dipped by 6.84% over the prior 12 months.

One clear upshot to this broad-based sell-off is that yields, on balance, have steadily ticked higher. The core reason is that corporate earnings have remained strong, despite the tough conditions presented by the broader operating environment. The net result is that a surfeit of income stocks now offer yields in excess of 5% per year, a mark that is nearly three times higher than the average yield among stocks listed on the benchmark S&P 500.

A roll of U.S. currency next to a tiny sign that reads dividends.

Image source: Getty Images.

Within the ever-expanding high-yield dividend universe, Medical Properties Trust(NYSE: MPW) and Philip Morris International(NYSE: PM) are two of the most popular names among retail investors. But which of these popular high-yield stocks is the better buy right now? Let's break down the pros and cons of each equity to find out.

The case for Medical Properties Trust

Medical Properties Trust is a global healthcare real estate investment trust (REIT). Thanks to concerns over tenant rent-paying and rising interest rates, the healthcare REIT's shares have stumbled by nearly 27% so far this year, resulting in a massive 36.7% uptick in its dividend yield over the last three months.

As a result, Medical Properties' stock now sports a noteworthy 14.4% annualized yield. The healthcare REIT's shares are presently trading at a 10-year high from a dividend yield standpoint, and a 10-year low in terms of price per share.

How sustainable is this ginormous yield? Medical Properties sports an elevated payout ratio of 77% right now. That's not a completely unreasonable payout ratio within the broader REIT landscape, but it is high enough to warrant monitoring -- especially with some of the company's top tenants falling behind in their rent obligations.

The case for Philip Morris International

Philip Morris International is the largest tobacco company by volume in the world. At last count, the company owned 23% of the global tobacco market, excluding the U.S. and China.

Moreover, Philip Morris owns the commercial rights to iconic brands like Marlboro in key commercial territories, giving it immense pricing power in the premium cigarette category. And the addictive nature of its tobacco products has long been an important driver behind the company's steadily growing free cash flows.

PM Free Cash Flow Chart

PM Free Cash Flow data by YCharts

At current levels, Philip Morris stock pays an annualized yield of 5.28%. While the company does sport a fairly high payout ratio of 86%, the tobacco giant has a long track record of doling out a disproportionate amount of free cash to shareholders via dividends. In other words, this elevated payout ratio shouldn't be a huge cause for concern.

The one drawback with this dividend stock is the steady decline in global smoking rates. Philip Morris is transitioning the company to a smoke-free future, but this ambitious endeavor will take time to complete.

Which dividend stock is the better buy?

Although Medical Properties offers a far higher yield, Philip Morris is arguably the hands-down winner in this comparison. Philip Morris has a proven ability to generate profits in almost any kind of market, and it is an enormously profitable business to boot. As such, the tobacco giant's dividend, although less generous, is a far safer bet than this healthcare REIT.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

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