Shares of American Tower (AMT -0.43%) climbed 21% in the first half of the year as the company beat earnings estimates and overall investor sentiment improved for the real estate sector and 5G stocks.
American Tower is a REIT that owns and operates communication real estate, such as cell towers. It leases that equipment to telecommunication providers. Demand for mobile data and communications is one of the main catalysts for American Tower's financial performance, and the stock price is also influenced by investor demand for REITs and other income-generating stocks. As the chart above shows, American Tower's returns were highly correlated with the Vanguard Real Estate ETF (VNQ -0.48%) and the Defiance Next Gen Connectivity ETF (FIVG 0.34%).
American Tower remains an attractive income investment for people who anticipate growing demand for wireless communication services. The REIT looks to be handling a challenge posed by the merger of T-Mobile US (TMUS -0.42%) and Sprint. That merger led to some lease cancellations and non-renewals in cases where both providers were leasing equipment on the same tower. That headwind impacts 3%-4% of American Tower's total lease revenue, but the company is growing anyway.
Despite these challenges, American Tower still topped analyst estimates and increased its quarterly dividend twice in the first half of 2021. It also announced the purchase of Telefonica's (TEF) tower business, which will drive lease revenue even higher.
American Tower offers low-volatility exposure to the growth from the 5G network rollout. The REIT's revenue is fairly predictable because of the long-term leases signed by telecom providers. The stock's current 1.75% dividend yield falls right near the middle of its range over the past few years, so it's not particularly cheap or expensive on this basis. That yield is also somewhat lower than other dividend stocks for income investors. Appreciation for American Tower will need to be fueled by continued dividend growth.
It's completely plausible that American Tower's dividend keeps rising. It's been increasing steadily over the past decade, and economic trends around wireless communications should support the REIT. American Tower had a 50% dividend payout ratio in the most recent quarter, indicating that it produced twice as much cash as it distributed to shareholders. That's a healthy and sustainable level that certainly leaves room for growth.