1 High Yield Dividend Stock to Buy and 1 to Avoid

If you invest in dividend stocks, the one thing you will hate to see is a dividend cut. Unfortunately, they do happen, and you’ll likely have to deal with one in your portfolio sooner or later. How you choose to manage a dividend cutter can depend heavily on the company’s business and future prospects.

A good case study on both sides of this situation involves two dividend stocks I own that have cut their dividends. At the outset, I will say that I am so disappointed with my long-term investment in windy (VTR 0.51%) and so happy to continue owning WP Carey (WPC 0.42%). If you’re looking at dividend stocks right now, WP Carey is the better choice.

Here’s what you need to know and why I’m close to giving up on Ventas.

What happened to Ventas?

Ventas is a healthcare real estate investment trust (REIT) that owns senior housing assets, medical practices and medical research facilities. It is one of the largest healthcare REITs and is generally well-respected on Wall Street. That said, a significant portion of its senior housing portfolio is what is known in the industry as senior housing operating assets, or SHOPs. This means Ventas owns the properties and runs them as well.

Image source: Getty Images.

Technically, it hires another company to operate the assets on its behalf. But this is still very different from renting a property, as the performance of SHOP assets flows through Ventas’ top and bottom lines. When times are good, this can turbocharge revenues and earnings. When times are bad, it can lead to truly troubling financial performance. The SHOP portfolio was the reason Ventas had to cut its dividend at the height of the coronavirus pandemic. With more moves and fewer moves, its cash flow has come under a lot of pressure. And then he had to deal with tenants who rented housing for the elderly, who felt the same crisis.

The dividend cut made complete sense, which is why I decided to hold Ventas even after a dividend cut. But that was a long time ago and Ventas talked about the growth opportunity that will come as occupancy increases. In fact, funds from operations (FFO) rose 7% year-over-year in the second quarter of 2024, led by a 15.2% increase in net operating income in the REIT’s SHOP portfolio.

Looks like Ventas is out of the woods. Only Ventas has yet to start raising its dividend. Not even a token trip. The cut happened in mid-2020, so that’s a very long time without even trying to regain investor confidence in the dividend. I’m starting to feel like Ventas’ focus isn’t where I want it to be, which is providing investors (like me!) with a reliable and growing income stream.

VTR Data Dividends per Share (Quarterly) by YCharts

What happened to WP Carey?

One of my biggest issues here is that REITs are designed specifically to pass income to shareholders. As long as they pay out at least 90% of their taxable earnings as dividends, they avoid taxation at the corporate level. This is actually a pretty low bar because taxable income is affected by non-cash charges such as depreciation (which is significant for properties). Indeed, it’s likely that Ventas will at least try to do a bit more, just to signal to investors that it hasn’t lost its way. That’s why most dividend investors will likely be better off with the WP Carey net lease REIT right now. (A net lease requires tenants to pay most of the operating costs at the property level.)

Certainly, Ventas’ dividend yield of 2.8% is well below that of WP Carey, which yields 5.6%. But there is a more fundamental problem here. WP Carey is among the most diversified REITs you can buy, with assets in the warehousing, industrial and retail sectors, with a sizable “other” category to round things out. It also has a substantial presence in Europe in addition to its North American portfolio. That being said, management has made the decision to exit the office’s assets at the end of 2023.

The persistent impact of the pandemic on the office segment was the main driver of this choice. But since the office accounted for 16% of the portfolio, this change could not be implemented without a dividend reset. Not ideal, but understandable, just as it was understandable that Ventas cut its dividend in the face of COVID-19. And since WP Carey is a large and well-respected net lease REIT, it made sense for me to stick with the stock.

Here comes the most important difference between WP Carey and Ventas. In the quarter after WP Carey reset its dividend, it started raising it again. It has increased the dividend every quarter since the reset, returning to the quarterly growth cadence that existed before leaving office. In other words, WP Carey makes it clear to dividend investors that they matter. Unlike Ventas, WP Carey is already working to win back the trust of Wall Street.

Buy WP Carey for more than yield

Ventas is a generally well-run healthcare REIT, but WP Carey is a well-run REIT that also recognizes the importance of returning shareholder value through regular dividend increases. I am starting to look for an exit plan with Ventas at this point, but I have no intention of replacing WP Carey. And if you’re looking at high-yield stocks, you might want to add WP Carey to your shortlist. Management clearly believes your dividends are important.