The Greatest Health-Care Dividend Stock

Three trillion dollars. That's what the government projects total U.S. health-care spending will be in 2014. Move the clock forward to 2021 and that number is expected to reach $4.8 trillion. With that much money changing hands, it's no wonder many health-care stocks have done quite well.

Growth-oriented investors have enjoyed a wide selection of potential health-care winners in recent years. Biopharmaceutical firm Amarin (NAS: AMRN) , for example, nearly doubled share prices in 2012. Its drug for treating high glycerides could be a huge seller.

Value investors haven't suffered a shortage of health-care alternatives, either. One current possible play for these investors is Allscripts (NAS: MDRX) . The health-care information services stock trades at a forward P/E below 13.

But what about the outlook for dividend investors? Which health-care stock is the greatest opportunity from a dividend perspective? Specialty REIT Medical Properties Trust (NYS: MPW) just might fit the bill. Let's examine why.

Dividend yield
Medical Properties Trust has a dividend yield of 8.2%. Its average dividend yield over the past five years was 9.4%. That sounds really good, but can dividend investors do better? They can, but not in health care.

I ran multiple screens in an attempt to find health-care stocks with a market cap of at least $250 million that beat Medical Property Trust's yield. And I did find one that had a higher yield -- PDL BioPharma (NAS: PDLI) . This small-cap biopharmaceutical company boasts a dividend yield of 8.5%.

To qualify as the greatest health-care dividend stock, we would expect at least five years of regular dividend payments. However, PDL only initiated dividend payments in 2009 (excluding a special cash dividend in 2008 resulting from a sale of some assets). That doesn't quite meet our five-year threshold. PDL could be a stock to watch in the future, though.

Dividend strength
What about reliability of dividend payments? Medical Properties Trust has consistently paid out dividends each quarter since its first dividend in 2004. However, the company reduced the amount of its dividends in the fourth quarter of 2008 in the midst of the U.S. economic crisis.

While Medical Properties Trust showed consistency in the past, some investors could have questions about its ability to continue paying dividends at current levels. The company's dividend payout ratio of 381%, which can be found on many financial websites, might look scary.

However, the normal payout ratio calculation that divides the dividend payment by earnings isn't as appropriate for REITs because of the impact of depreciation. A better calculation method uses adjusted funds from operations (AFFO) in place of earnings. Using this method, Medical Properties Trust currently has a payout ratio of 91%. The company expects that this ratio will decrease to around 75% by early 2013.

Company strength
Dividend strength stems directly from the strength of the company. Medical Properties Trust appears to be solid on several key fronts. Revenue in the second quarter increased 46% compared to the same quarter last year. Normalized funds from operations (FFO) were up 37% year-on-year.

The company makes its money by focusing on health care. It claims to be the only health-care REIT centered exclusively on funding hospitals and other facilities where patients are admitted by doctors. At last count, Medical Properties Trust's portfolio included 79 health-care properties in 23 states.

Its customers include 21 hospital operating systems. As the chart below shows, few of these leases are in jeopardy of nonrenewal in the near future.

Source: Company 10-K report.

With long-term leases and customers who provide needed services to their communities, Medical Properties Trust should be able to count on a steady revenue stream for years to come. Assuming the company manages its debt levels appropriately, investors should be able to count on dividend payments for years to come.

The greatest?
So is Medical Properties Trust really the greatest health-care dividend stock? It depends on your definition of "greatest."

Probably no other health-care stock can top the record of Johnson & Johnson (NYS: JNJ) when it comes to reliability. J&J has not only paid dividends for half a century, it recently increased dividend payments for the 50th consecutive year.

However, its current dividend yield is 3.6%, well below that of Medical Properties Trust. My calculations show that J&J could catch up to the Alabama-based REIT in 2023, assuming J&J increases its dividends at the same rate as the past five years and Medical Properties Trust holds its dividends at current yield levels.

All things considered, I think Medical Properties Trust can legitimately lay claim to the title of greatest health-care dividend stock. Dividend-oriented investors might want to check out this stock that holds the promise for healthy and predictable returns.

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Fool contributorKeith Speightsowns no shares in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of and creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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