Penny stocks may provide the impression that you can earn multiples of your original capital since they are usually cheaply priced, but this is a dangerous illusion. Businesses that have lost their competitive edge or fallen on tough times eventually end up in the bargain bin because their businesses are in trouble. By rummaging through this bin, you may inevitably end up buying a subpar business that's likely to stay cheap or end up even cheaper.
High-quality businesses, on the other hand, deliver consistent growth over time and many also pay out an increasing dividend due to improved business performance. Investors can end up with the best of both worlds -- a steadily rising share price and an increased flow of dividends into their bank account. The key is to identify trends and catalysts that such businesses can latch on to that will power their growth for many years to come.
Rather than wasting your money and effort on penny stocks, here are three billion-dollar companies you should look at instead.
American Tower
The pandemic has resulted in an explosion in data usage as people turn to the internet more to work, study, and socialize. A key beneficiary of this trend has been American Tower (AMT -0.39%), which owns around 186,000 communication sites that are leased to internet and communication service providers. The real estate investment trust (REIT) enters into long-term leasing agreements with rent increases embedded in them.
American Tower has an impressive track record of raising its dividends by an average of roughly 20% per year since 2013, providing income-seeking investors with an increasing flow of dividend income. Its leases are also signed with large, reputable telecommunication companies such as AT&T and T-Mobile, thereby minimizing the risk of non-collection of rent.
The REIT has grown through acquisitions fueled by debt, going from 149,246 towers at the end of 2017 to 183,860 towers at the end of 2020. In January of this year, American Tower added another 31,000 communication sites to its growing portfolio with the acquisition of Telxius Towers for around $9.4 billion. With 5G networks set to be the next-generation upgrade for internet companies, American Tower should see continued strong leasing demand for its portfolio that can drive future returns for investors.
Image source: Getty Images.
Tractor Supply Company
If you need new equipment for your farm, or if you're looking for accessories for your pet, then Tractor Supply Company (TSCO 2.43%) is the place to visit. The company is the largest rural lifestyle retailer in the U.S. with 1,944 stores located in 49 states. The pandemic has unexpectedly caused Americans to focus more on their land, farms, and pets, leading to a blowout year for Tractor Supply in 2020 as net sales increased by 27% year over year. In January, Tractor Supply hiked its quarterly dividend by 30% to $0.52 per share, a sign of confidence in the company's prospects.
The first quarter of 2021 saw the strong sales momentum continuing. Tractor Supply announced a sharp 42.5% year-over-year increase in net sales, with comparable-store sales jumping by 38.6%. The company also reported strong e-commerce sales, recording a triple-digit year-over-year rise for the fourth consecutive quarter. Net income for the quarter more than doubled year over year to $181 million. The strong showing led the company to revise its fiscal 2021 outlook upward for both net sales and net income as it continues to open new stores.
The company believes that there is still significant growth potential as the market remains highly fragmented with multiple players jostling for a lucrative piece of the pie. Tractor Supply estimates that it has just a 10% market share of the rural lifestyle industry despite being the largest player, and that the total addressable market is as large as $110 billion. The company has identified opportunities to eventually open up to 2,500 stores around the U.S. As Tractor Supply steadily opens more stores, investors can look forward to further increases in sales and profits.
PayPal
The pandemic has helped fuel a surge in the number of people using e-commerce and carrying out online payments, a trend that has greatly benefited PayPal (PYPL -1.99%). The payments platform provider finished off 2020 with one of its best years ever, with total payment volume (TPV) jumping 31% year over year to $936 billion. A record 73 million new net active accounts joined PayPal's platform last year, bringing total active accounts to 377 million.
This momentum is set to continue this year as the company forecasts a 20% year-over-year growth in TPV with around 50 million more accounts added. The pandemic accelerated a trend that had already taken root many, and online payments look set to stay.
The company is also expanding its capabilities to handle cryptocurrencies and digital assets by acquiring Curv in March. Curv provides cloud-based infrastructure for digital asset security and will add to PayPal's capabilities in managing and storing cryptocurrencies such as Bitcoin. More recently, PayPal's digital wallet, Venmo, began allowing its 70 million customers to buy, sell, and hold cryptocurrencies, providing yet another payment option for users.
PayPal's foray into cryptocurrencies and the ongoing tailwinds in the online payments space will act as strong catalysts for the company's long-term growth.
