The Dow Jones Industrial Average consists of 30 of the best businesses in the world. Therefore it shouldn't be surprising to learn that many of the Dow Jones components are also proven dividend growth stocks.
American Tower (AMT -0.70%) may not be a part of the Dow. But it would have parlayed a $5,000 investment made 10 years ago into $15,900 with dividends reinvested, so the real estate investment trust (REIT) has a track record of outperformance. This edges out the $14,500 that the same investment amount in the Dow index would now be worth with dividends reinvested. Let's assess why that healthy performance could be poised to continue.
Mobile data consumption isn't going anywhere but up
Boasting a portfolio of about 226,000 cell towers, antenna systems, and data centers in 25 countries as of June 30, American Tower is the largest cell tower REIT on the planet. In fact, there's a good chance that if you're reading this article on your smartphone, the company's infrastructure may be working behind the scenes.
Major telecom companies like T-Mobile sign leases on initial non-cancellable terms of five to 10 years with American Tower for the right to put their equipment in its cell towers. Together this is what broadcasts the signal to your phone and lets you browse the web, shop online, and check emails. The contracts also often include multiple five-year renewal periods and annual lease escalators. As long as the telecom industry remains solvent, these commitments give American Tower stable revenue and adjusted funds from operations (AFFO) per share.
As global economic growth continues, it's difficult to imagine a future in which more communications sites like cell towers are not needed. This is because monthly mobile data consumption per smartphone user is expected to compound at a rate of 14.3% annually in India and 24% in Brazil and Mexico between 2023 and 2028. That gives plenty of room for American Tower to continue building out its network of infrastructure for the foreseeable future.
The company has been hurt by some industry consolidation of late, including the T-Mobile and Sprint merger. This resulted in a reduction in the communications sites that the combined company needed to lease from American Tower. But as the years progress, rising data consumption and demand for cell towers should more than offset such bumps in the road.
Image source: Getty Images.
A consistently growing payout
For income investors also seeking solid dividend growth, American Tower's 3.4% dividend yield is a sight for sore eyes. This is meaningfully higher than the average 2.7% dividend yield of the Dow. Not to mention that the consistent dividend growth that American Tower hands out on a quarterly basis puts its most recent dividend nearly 10% above the dividend from the year-ago period.
Decent dividend growth should continue. Aside from steadily rising AFFO per share, American Tower's dividend payout ratio is poised to be around 65%. When including debt and share issuances, this provides the company with the funds necessary to invest in growth.
Risks appear to be priced into the stock
Shares of American Tower haven't fared well lately and have declined 36% in the past year. Besides telecom industry consolidation, higher interest rates have reduced the appeal of this REIT and most others. This has pushed the current-year price-to-AFFO ratio down to a little more than 18 at the current $176 share price. For investors patient enough to wait for interest rates to begin falling as early as next year, major upside could lie ahead in American Tower: Analysts have an average 12-month share price target of $233, which I believe makes the REIT a buy for dividend growth investors.
