I love receiving dividends. There's just something about getting paid for work someone else did. However, I've shifted my investing strategy over the years from focusing on a company's dividend yield to its ability to grow its payout. The reason is simple. Dividend growth stocks deliver the highest returns.
The data on dividend growth is pretty remarkable. Over the last 50 years, dividend growers in the S&P 500 have delivered an average annual return of 10.2%, according to data from Ned Davis Research and Hartford Funds. They have significantly outperformed the market average (7.7%), companies with no change in their dividend policy (6.6%), and non-dividend payers (-0.6%).
That historical performance is leading me to load my portfolio with dividend growth stocks. One that I can't get enough of right now is American Tower (AMT 1.04%). Here's why I keep buying more shares of the data infrastructure REIT.
An elite dividend
American Tower has an excellent track record of paying dividends since it converted to a REIT in 2012. It has increased its payout every year, growing it at a more than 20% compound annual rate:
While dividend growth has slowed in recent years, it's still rising at an above-average pace (it grew 12.5% last year and should rise 10% in 2023).
The company generates plenty of cash to cover its payout. It expects to pay $3 billion of dividends this year, giving it a dividend payout ratio of about 67% of its adjusted funds from operations (FFO). That will enable the REIT to retain enough cash to fund its entire growth capital spending plan ($1.5 billion). American Tower further supports its dividend with a strong investment-grade balance sheet. While its current leverage ratio of 5.2 times is above its long-term target range of 3 to 5 times, it's still relatively low for a REIT.
Trading at an attractive value
Even though I no longer focus solely on a stock's dividend yield, it's hard not to notice that American Tower's payout is currently around 2.4%. That's higher than the dividend yield on the S&P 500 (recently 1.6%) and near the company's historical high.
That's due largely to the more than 30% slide in the stock price from its 52-week high because of higher interest rates, foreign exchange rate fluctuations, some tenant issues, and economic concerns. However, despite those headwinds, American Tower still expects to grow this year, albeit at a very modest 1% per share for adjusted FFO. That sell-off has shares trading at a much lower valuation at about 20 times adjusted FFO. That's a very reasonable price to pay for a high-quality REIT.
A growth reacceleration is ahead
While American Tower isn't growing very much this year, it expects to reaccelerate in the future. It's battling several headwinds, which are offsetting solid organic growth. The company expects organic tenant billings to grow 5% this year, driven by higher lease rates and demand for additional space on existing towers and in data centers. The catalysts driving this growth (the rollout of faster 5G networks and growing data usage) should continue powering rising demand for data infrastructure in the coming years. Because of that, adjusted FFO per share growth should reaccelerate as its other headwinds fade.
The REIT is also investing about $1.5 billion to fund accretive international cell tower builds and attractive data center investments. These projects should supply some incremental cash flow as they enter service. Meanwhile, the company's falling leverage ratio will give it additional financial flexibility to make acquisitions in the future.
In commenting on what's ahead, CEO Tom Bartlett stated on the first-quarter conference call:
[O]ur foundational U.S. tower and data center platforms are set to deliver continued growth and strong returns. We believe that the long-term secular tailwinds, the differentiated high-quality nature of both our U.S. tower portfolio and our data center interconnection platform, the value proposition they represent for our customers and the seasoned high talented teams managing them uniquely positions American Tower to create significant incremental value for the industry and our shareholders for many years to come.
A great time to buy
American Tower has a great record of growing its dividend, which is reason enough to continue buying shares. However, the company also trades at a much more attractive valuation and dividend yield following its sell-off, even though its long-term growth outlook remains highly attractive. Because of that, I plan to continue buying shares as I have cash to invest.