A common mistake many income-focused investors make is focusing on a stock's current dividend yield. At best, these stocks will provide a bond-like return primarily consisting of dividend payments. Meanwhile, some have high yields because their payouts are on shaking ground, putting them at risk of a reduction.
A far better investment strategy is to seek out companies that pay growing dividends. Dividend growth stocks have historically delivered superior total returns (with dividend income plus stock price appreciation).
American Tower (AMT 0.94%) and Invitation Homes (INVH 0.57%) stand out for their ability to raise their dividends. Because of that, investors who buy today could be earning a much higher yield five years from now.
Towering growth
Five years ago, American Tower's dividend yielded around 2%. But investors who bought shares of this data infrastructure REIT at that time are earning a much higher yield today (well over 4%).
American Tower has grown its payout at a more than 15% compound annual rate over that time frame, which has helped power a roughly 40% total return for investors over the last five years.
Today, the company has a slightly more attractive starting yield of around 3.6% (more than double the 1.6% from the S&P 500). That's a great takeoff point for a payout that will likely continue rising at an above-average rate.
American Tower expects to increase it by around 10% this year. Meanwhile, the company sees a long runway ahead. CEO Tom Bartlett said on the second-quarter conference call, "We believe our global platform of assets is exceptionally positioned to benefit from what we expect to be a massive wave of incremental infrastructure demand required to support the technological advancements and network capabilities we're beginning to see in the market today."
Demand catalysts like 5G, artificial intelligence, and business transformation should drive margin expansion and new investment opportunities to power healthy cash-flow growth. That should enable the REIT to continue boosting its payout at an above-average rate.
Focused on a fast-growing opportunity
Invitation Homes offered a sub-2% dividend yield five years ago. But those who bought shares of the single-family rental REIT at that time would now have a yield of more than 4.5% based on that initial cost. The payout had a nearly 19% compound annual growth rate during that period, helping drive a more than 70% total return for shareholders.
The residential REIT currently yields around 3.1%, which could be a lot higher in a few more years -- Invitation Homes most recently boosted its payout by 18.2% in February.
Two catalysts are driving the company's rapid growth: rising rents and acquisitions. It focuses on owning single-family homes in fast-growing markets with limited supply. That's enabling it to benefit from the strong demand for rental homes, which is driving high occupancy levels and above-average rent growth. Over the last five years, its "same store" net operating income has grown by 46.6%, significantly faster than the average growth rate across multifamily properties (28.9%).
The REIT has multiple acquisition sources, including relationships with builders and the financial scale to buy large portfolios. For example, it recently spent $650 million to buy nearly 1,900 homes in high-growth markets.
It took delivery of 157 brand-new homes from builders in the second quarter and has contracts to buy nearly $900 million in new homes in the future. A growing portfolio and rising rents should enable the company to continue increasing its dividend at an attractive rate.
Patience pays dividends, too
High dividend yields are often at a higher risk of a reduction, and those payouts typically account for most of a stock's return.
Because of that, investors should seek companies that can increase their dividends at above-average rates, like American Tower and Invitation Homes, which in turn sets them up to grow into a much higher yield.
In addition, shareholders should see healthy stock price appreciation. With more dividend growth likely for these two REITs, they look like great stocks to buy and hold for the next several years.