This REIT has generated impressive dividend growth
American Tower (AMT 0.27%) may not stand out to dividend investors at first glance. The real estate investment trust (REIT) currently offers a dividend yield of 2.2%. Although this is slightly higher than the 1.7% dividend yield offered by a S&P500 index fund, it probably isn’t attractive enough for many income-oriented investors.
However, what American Tower lacks in current yield, it more than makes up for in dividend growth. For this reason, what may not seem like a compelling performance right now may turn into one over time.
From ridiculous to powerful
American Tower made its first quarter Dividend payment in 2012, shortly after its conversion into a REIT. An investor who bought shares in early 2012 would have received a dividend of $0.21 per share that first quarter. That gave him a 1.4% annualized dividend yield based on this first payment and the share price of approximately $60 upon conversion.
While the dividend was insignificant at the time, it has become an important income stream over the years. The Infrastructure REITs has increased his payment at a compound annual rate by more than 20% since he started making them ten years ago. The most recent payout was $1.40 per share. This higher rate means investors who bought shares around the REIT conversion now earn a 9.3% dividend yield on their investment. In other words, every $1,000 invested in American Tower upon conversion now generates $93 in annual passive income, up from $14 in annualized passive income in the first year.
This rapidly growing revenue stream has enabled American Tower to produce impressive total returns. While the REIT’s shares are up almost 330% since its conversion, the total return is almost 420%. This hypothetical $1,000 investment upon conversion from the REIT grew to nearly $5,175. This number will likely continue to grow as American Tower continues to increase its dividend.
Today’s unappetizing yield could be tomorrow’s most satisfying payout
American Tower expects to continue to increase its dividend at a healthy pace going forward. It has a long list of growth engines including:
- Organic growth in tenant billing: The REIT can continue to add new tenants to its existing cell towers while benefiting from contractually determined rate increases.
- Development of a new tower: American Tower will have to continue building towers to support its tenants’ network extensions. It will build 3,300 towers on its own to support the growth of a tenant in Europe and Latin America.
- Data Center Expansions: Infrastructure REIT expanded into the data center industry last year, acquiring CoreSite Realty and DataSite to build an American data center platform it aims to take globally . It stands to benefit from higher pricing and its ability to organically expand its data center platform through development projects in the future.
- Purchases: American Tower has a long history of accretive tower acquisitions. Additionally, it could make deals to further expand its data center platform.
Meanwhile, American Tower has a strong financial profile to support its continued expansion while increasing its dividend. Despite the rapidly rising dividend, American Tower had a conservative payout ratio of 55% of its adjusted funds from operations in the first quarter. This allows it to retain a significant amount of cash to reinvest in expanding its operations. On top of that, the REIT has a strong, high-quality balance sheet. While its leverage ratio is currently above its target range after two large-scale acquisitions last year, it recently sold a 29% stake in its data center business to a private equity partner. This deal will give him cash to reduce leverage while transferring some of the funding needed to expand his data center operations to his new partner.
American Tower aims to increase its dividend by 12.5% this year. While it may grow its payouts at a slower pace in the future, given its massive size as one of the largest REITs, it should still be able to generate attractive dividend growth. For that reason, income-focused investors should look past the company’s seemingly unattractive 2.2% yield for what could be a much bigger stream of income in the years to come.
Growth often pays the biggest dividends
Income-oriented investors are often caught up in a stock’s current dividend yield. This causes them to miss the potentially larger revenue opportunity of companies that can increase their dividends at high rates. This has certainly been the case for American Tower over the years. With more growth seemingly to come, this REIT looks attractive to investors willing to expect a much larger revenue stream.