As an income investor, it can be tempting to indiscriminately buy the highest-yielding stocks to generate huge passive income for your portfolio. But investors should be very careful about what stocks they choose. While a big dividend may help juice income in the short run, you run the risk of falling victim to a painful dividend cut at some point.
Fortunately, there are some stocks in the investment universe with yields several times higher than the S&P 500 index's 1.6% yield, and they don't appear to be yield traps. Sporting a 5.4% dividend yield, Crown Castle (CCI -0.67%) is one such stock. Let's dig into what makes Crown Castle an income stock that's deserving of your confidence and hard-earned money.
A promising future despite short-term challenges
Crown Castle is the biggest U.S.-focused cell tower real estate investment trust (REIT). The company's portfolio consists of more than 40,000 cell towers, roughly 120,000 small cells to enhance communication networks in densely populated areas, and about 85,000 route miles of fiber optic cable. If you're reading this article on your mobile device, there's a good chance you are the beneficiary of Crown Castle's infrastructure being leased to giant telecom companies. Major telecoms lease the company's infrastructure, which makes it possible for them to broadcast their signals and data services to customers.
As video streaming, online shopping, and emerging technologies like virtual reality become more prominent over time, it's impossible to imagine mobile data consumption not soaring. U.S. average monthly smartphone data usage is expected to shoot up by 135%-plus from 2023 to reach 56.8 gigabytes by 2028. This tremendous growth in data consumption could lead to 15% to 30% annual growth in small cells by 2025, or between an additional 500,000 and 1 million, implying Crown Castle has a considerable growth runway ahead.
But even with this encouraging long-term outlook, it is worth mentioning that the company is experiencing two headwinds that will damp its growth prospects for a bit. Recent consolidation within the mobile carrier industry stemming from the Sprint and T-Mobile union has led to the two companies eliminating redundancies within their combined network. Chief Executive Officer Jay Brown predicts that this, along with higher interest rates, will have a $350 million impact on Crown Castle over the course of 2024 and 2025.
But the good news for the company is that the vast majority of its $21.6 billion in debt as of March 31 is at fixed interest rates (91%), with just $2.9 billion of that debt coming due through 2025. So, the company may not have to worry about elevated interest rates by the time it refinances much of its debt.
Image source: Getty Images.
Decent payout growth can continue
Since announcing a long-term annual dividend-per-share growth target of 7% to 8%, Crown Castle has gone above and beyond, delivering 9% annual dividend growth to shareholders. The only caveat is that dividend growth will come in below this target for the next couple of years due to the two headwinds mentioned above, according to Brown.
Crown Castle's dividend payout ratio is poised to register in the low-80% range in 2023. And once the negative impact of T-Mobile's lease cancellations is in the rearview mirror, Crown Castle's dividend growth should be able to rebound as adjusted funds from operations (AFFO) per share growth improves. REITs tend to use AFFO, which excludes the high non-cash depreciation and amortization costs of real estate investments, thus giving a more accurate picture of a REIT's cash generation powerl.
Crown Castle is a no-brainer buy
Near-term bumps in the road have led Crown Castle to significantly underperform financial markets, with shares of the REIT down 15% so far this year. Coupled with the forecast of modest AFFO per share growth, this has pushed the stock's price-to-AFFO-per-share multiple down to just 15.1 at the current $115 share price. Considering Crown Castle's strong growth potential, this could make the stock an excellent buy for dividend growth investors.
