American Tower (AMT 3.79%) might not stand out to dividend investors at first glance. The real estate investment trust (REIT) currently offers a 2.2% dividend yield. While that's slightly higher than the 1.7% dividend yield offered by an S&P 500 index fund, it's likely not appealing enough for many income-focused investors. 

However, what American Tower lacks in current yield, it more than makes up for with dividend growth. Because of that, what might not look like a compelling yield right now can grow into one over time.

From paltry to powerful

American Tower made its first quarterly dividend payment in 2012, shortly after converting into a REIT. An investor who bought shares in early 2012 would have collected a $0.21 per share dividend that first quarter. That gave it a 1.4% annualized dividend yield based on that first payment and the roughly $60 share price at the time of its conversion. 

While the dividend wasn't much then, it has grown into a significant income stream over the years. The infrastructure REIT has expanded its payout at a more than 20% compound annual rate since it first started making them a decade ago. The most recent payment was $1.40 per share. This higher rate implies that investors who bought shares around the REIT conversion are now earning a 9.3% dividend yield on their investment. Put another way, every $1,000 invested in American Tower at its conversion is now generating $93 in annual passive income, up from $14 of annualized passive income that first year. 

That fast-growing income stream has enabled American Tower to produce towering total returns. While shares of the REIT are up nearly 330% since its conversion, the total return is almost 420%. That hypothetical $1,000 investment at the REIT's conversion has grown to nearly $5,175. That number will likely keep growing as American Tower continues expanding its dividend. 

Today's unappetizing yield could be tomorrow's more satisfying payout

American Tower expects to continue growing its dividend at a healthy rate in the future. It has a long list of growth drivers, including:

  • Organic tenant billings growth: The REIT can continue adding new tenants to its existing cell towers while benefiting from contractually driven rate increases.
  • New tower development: American Tower will need to continue constructing towers to support the network expansions of its tenants. It will build 3,300 towers alone to support one tenant's growth in Europe and Latin America. 
  • Data center expansions: The infrastructure REIT expanded into the data center industry last year, acquiring CoreSite Realty and DataSite to build out a U.S. data center platform that it aims to take globally. It should benefit from higher rates and its ability to organically expand its data center platform through development projects in the future. 
  • Acquisitions: American Tower has a long history of making accretive tower acquisitions. In addition, 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 growing its dividend. Despite the rapid rise in the dividend, American Tower had a conservative payout ratio of 55% of its adjusted funds from operations during the first quarter. That's enabling it to retain a significant amount of cash to reinvest in expanding its operations. In addition to that, the REIT has a solid investment-grade balance sheet. While its leverage ratio is currently above its target range following two large-scale acquisitions last year, it recently sold a 29% interest in its data center business to a private equity partner. That deal will give it cash to reduce leverage while offloading some of the funding needed to expand its data center operations to its new partner. 

American Tower is targeting to grow its dividend by 12.5% this year. While it might increase its payout at a slower rate in the future, given its massive size as one of the largest REITs, it should still be able to deliver compelling dividend growth. Because of that, income-focused investors should look past the company's seemingly unappealing 2.2% yield to what could be a much larger income stream in the coming years.

Growth often pays the biggest dividends

Income-focused investors often get caught up in a stock's current dividend yield. That causes them to miss the potentially greater income opportunity from companies that can grow their dividends at high rates. That has certainly been the case for American Tower over the years. With more growth seemingly ahead, this REIT looks attractive for investors willing to wait for a much larger income stream.