There is an old investing adage that the higher the risk, the higher the return potential. While that's not always true, in many cases, investors need to take on more risk to earn a higher return. It's their reward for investing money at risk of loss.
While all investing involves some form of risk-taking, many investors (especially those seeking to generate income) prefer to limit their risk. However, there are some intriguing income opportunities for those willing to take on more risk. For example, those with $10,000 they want to invest in higher-risk, higher-upside opportunities can potentially turn that capital into a supercharged income stream by investing it in a trio of dividend stocks with big-time yields:
Dividend Stock | Investment | Current Yield | Annual Dividend Income |
|---|---|---|---|
Rithm Capital(NYSE: RITM) | $3,333.34 | 9.62% | $320.51 |
Medical Properties Trust(NYSE: MPW) | $3,333.33 | 16.53% | $551.00 |
NextEra Energy Partners(NYSE: NEP) | $3,333.33 | 12.04% | $401.33 |
Total | $10,000.00 | 12.73% | $1,272.85 |
Data source: Google Finance and author's calculations.
Here's a closer look at why those yields are so high and whether these companies can sustain their big-time payouts.
The evolution of a high-yielding REIT
Rithm Capital is a unique mortgage real estate investment trust (REIT). It started with a focus on investing in mortgage-servicing rights. However, it has since expanded its platform, evolving into an asset manager. Last year, it took a notable step in its transformation, acquiring Sculptor Capital Management in a deal that significantly expanded its asset-management capabilities.
The company believes its shift toward asset management will put it in a better position to maintain its earnings base and grow its business. A steadier and growing earnings base would enhance its ability to pay dividends.
However, as Rithm Capital becomes more of an asset manager, the company risks outgrowing the REIT structure. If that were to happen, the company might need to convert into a taxable corporation. Such a switch might also lead it to reset its dividend since it won't need to meet the high-payout requirements of being a REIT. That would enable Rithm to retain more cash to fund its growth ambitions. The risk of a potential dividend reset is a factor income-focused investors need to consider.
Unhealthy tenants
Medical Properties Trust is a healthcare REIT focused on owning hospitals. The company has been under tremendous pressure over the past couple of years due to tenant issues and rising interest rates. Those headwinds already led the REIT to slash its dividend by almost half last year.
The hospital owner has been working directly with its tenants to provide assistance in the form of rent deferrals and loans. It hopes that these moves will enable its tenants to get through their rough patches so that they'll be able to resume paying rent. However, the company seems to be taking one step forward and two back, as its tenants' issues aren't improving as quickly as hoped.
In addition to its tenant troubles, Medical Properties Trust is battling higher-interest rates. They're making it more challenging to refinance maturing debt. That has led the REIT to sell properties to repay debt. While it has the funds needed to repay its 2024 maturities, more debt is coming due over the next few years. If interest rates and the REIT's tenant issues don't improve, it might need to cut its dividend again to retain more cash to repay debt and rebuild its portfolio.
Running low on power
NextEra Energy Partners has also faced stiff headwinds from higher-interest rates. They've made it more difficult for the renewable energy producer to access the lower-cost capital it needs to redeem maturing funding and finance new acquisitions.
The company's issues have forced it to shift gears. It revealed a plan to sell off its natural gas-pipeline assets to help fund the redemption of maturing financing. It closed one sale late last year and plans to put its remaining gas-pipeline assets up for sale in 2025.
In addition, NextEra Energy Partners slowed its growth target. It cut its dividend-growth expectations from 12% to 15% annually through 2026 to 5% to 8% with a goal of 6%. The company also pivoted its main growth driver from acquisitions to repowering existing wind farms.
One concern with the company's strategy is it expects its dividend-payout ratio to be in the mid-90s through 2026. That extremely high level doesn't leave much room for error. If the company runs into an issue selling its remaining gas pipelines or with its repowering plan, it might need to cut its dividend to help strengthen its balance sheet or fund its growth.
High-risk, high-reward dividend stocks
Rithm Capital, Medical Properties Trust, and NextEra Energy Partners offer investors big-time yields. Unfortunately, they also come with higher-risk profiles. Because of that, they're not for everyone. However, for those with a high-risk tolerance, they could supply a high-octane income stream and high-upside potential if they can execute their strategies while maintaining their payouts.
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Matt DiLallo has positions in Medical Properties Trust and NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
