Nailing down an investment approach when you're retired or nearing retirement comes with a difficult conundrum. On one hand, focusing on rock-solid dividend-paying stocks is a fantastic way bolster your income, but with potentially decades yet to live, you're also going to want some growth to continue building wealth.
Real estate investment trusts, or REITs, like American Tower (NYSE:AMT) and Public Storage (NYSE:PSA) strike this delicate balance beautifully. As REITs, these companies are required to distribute 90% of their taxable income toward dividends, and, with plenty of opportunity to grow earnings by increasing rent or expanding their portfolios of real estate, these companies offer the perfect one-two punch.
1. American Tower
You may have noticed that phones have gone through some pretty dramatic changes over the last decade. As the technology for devices like smartphones become more advanced, it requires more bandwidth to operate effectively and therefore more densely connected networks of cell towers to support the usage, and that's where American Tower comes in.
As of this past June, the $39 billion company owns a portfolio of approximately 97,000 cell towers. About half of those are located in North America, and the remaining towers are located in key areas in South America, Africa, India, and Germany. However, instead of interacting directly with consumers via their own network, American Tower leases space to the biggest and baddest carriers on the block, like AT&T and Verizon.
It would seem logical for a behemoth of a company like Verizon to acquire its own cell towers, but leasing is actually more cost effective and provides greater flexibility. Because of this mutually beneficial relationship, large carriers like Verizon are happy to sign long-term contacts (about 10 years on average), which creates very sticky relationships. In fact, annual tenant churn -- or revenues lost each year due to cancelled or non-renewed leases -- is a remarkably low 1% to 2%.
Lastly, the U.S. is far and away the world's leader in smartphones and data usage, but according to American Tower, countries like Brazil, Chile, Mexico, and several others, are steadily becoming more data-centric. Over the last two decades, American Tower has developed the scale and relationships with carriers to take advantage of this emerging trend as it spreads across the globe, and I expect them to follow through.
2. Public Storage
It may seem odd to follow American Tower with a company that owns self-storage facilities, but if you take a step back, these companies have a few important similarities.
First, both are leaders in their respective industries. As of June, Public Storage owned interest in 2,262 self-storage facilities located in 38 states, and another 216 facilities in Western Europe. However, despite being the industry's overwhelming leader, Public Storage holds just 5% of the U.S. market share and has a bevy of local and regional competition.
The good news for Public Storage is that being the biggest has its advantages. For instance, the company has brand recognition in a fragmented industry. They also have an "A" credit rating from Standard and Poor's (a product of being a large and stable business), meaning that Public Storage has better access to capital at lower costs, which is perfect for buying up prime locations and using them for redevelopment and advertising. All together, this gives Public Storage the firepower to fend off competitors.
Second, American Tower and Public Storage provide the best answers to a growing need. The U.S. population is growing by a few million each year, and people continue to flock into major cities where Public Storage focuses its assets, so the traditional drivers of self-storage -- like death, divorce, downsizing, and relocation -- should generate steadily increasing demand. This may not sound like much, but it's the only tailwind Public Storage has needed throughout its more than 40-year history. The company has generated a compound annual total return of 15% over the last decade, and that figure includes operating through one of the worse recessions in U.S. history.
Ultimately, while I don't believe there are perfect stocks, I do believe some investments are perfectly suited to meet specific needs. Public Storage and American Tower aren't the only top-notch dividend stocks out there, but, as leaders in their industries with proven track records, I think American Tower and Public Storage can provide the perfect balance of growth and stability.