Sky-high dividend yields are nice, but the best dividend stocks offer stability and predictability. A stock yielding 3% that's nearly guaranteed to pay that dividend quarter after quarter is far more attractive than a 6% yielder that may not be able to sustain any dividend when the going gets tough.
In the world of reliable dividend stocks, you can't do much better than American Tower (AMT -0.70%).
Built-in predictability
American Tower is a real estate investment trust that owns and operates telecommunications sites, primarily cell towers. The company owns over 223,000 towers around the world.
The business model is simple: American Tower leases space on its towers for telecom companies to house equipment. The key is that a single tower can host multiple tenants. The cost to operate a tower is largely fixed, so adding an additional tenant generates more revenue without much increase in costs. While a single-tenant tower produces a poor return on investment, a multitenant tower is a cash machine.
It gets even better. American Tower's leases are generally long-term and non-cancellable, and they tend to have built-in annual lease escalators. In the United States, the three major wireless operators are financially stable and must continually invest in their respective networks to effectively compete. In many international markets, less industry concentration means that American Tower can potentially operate lucrative towers with four or five tenants.
There are also significant barriers to entry in the tower business. Building towers is capital- and time-intensive, and tower operators must successfully navigate a maze of local zoning laws. It's exceedingly unlikely that American Tower's core business will be disrupted in any meaningful way.
American Tower has a pretty good idea of what its revenue and profit are going to look like years into the future. The company isn't entirely immune from prevailing economic conditions. If wireless carriers pull back on capital spending in a recession, for example, those cuts will translate into a lower growth rate for American Tower. But for the most part, the company should do just fine in nearly any economic environment.
Here's a chart showing American Tower's annual revenue since the 1990s. While growth slowed during the financial crisis and the pandemic, it was largely business as usual for this predictable company.
AMT Revenue (Annual) data by YCharts.
A solid dividend
The predictability of American Tower's revenue and profit means that the company has a good idea of how big of a dividend it can safely afford to pay. Things would have to go catastrophically wrong for American Tower to cut its dividend. It's not impossible, but highly unlikely. Even through the pandemic, when many companies were forced to slash their dividends to preserve cash, American Tower kept pushing its own dividend higher.
The most recent quarterly dividend payment of $1.57 per share works out to a dividend yield of about 3.25%. That's not quite high-yield territory, but it is more than double the dividend yield of the S&P 500. One thing to note: American Tower's dividend will only grow as fast as the company's bottom line. During times when profit growth is sluggish, dividend growth will be sluggish as well.
As it stands today, American Tower's dividend is well covered by its adjusted funds from operations. The company produced adjusted funds from operations of $1.185 billion in the first quarter while paying out $727 million in dividends. This profitability metric will come under a bit of pressure this year, according to the company's guidance, but that won't be an issue for the dividend.
Stable and predictable American Tower is a fantastic dividend stock. For dividend investors looking to minimize risk, American Tower stock would be a great choice.
