Real estate investment trusts (REITs) can be a tremendous way to generate passive income -- especially if you're looking for reliability. Because these special dividend stocks are required to pay 90% or more of their taxable income in the form of dividends, they are some of the most dependable dividend stocks on the market today.
With that said, not all REITs are considered equal when it comes to maintaining their dividends. Some REITs will make cuts when times get tough. Concerns have recently surfaced over the probability of American Tower (AMT 1.09%) maintaining its impressive dividend streak after forecasting a decline in earnings in 2023. But here's why American Tower can keep paying you for years to come.
1. Demand for communication assets isn't slowing
American Tower is the leading communications infrastructure company not just in the U.S., but the world. At the end of 2022, the company had ownership or interest in more than 225,000 communication assets, including cellphone towers, antennas, and data center facilities in 19 countries. These properties are leased to tenants such as AT&T, Verizon, and other communications companies.
Data demand for mobile phones isn't slowing. In fact, data traffic growth on mobile phones is projected to grow at a compound annual rate of 21% by 2028 -- which would put usage nearly three times higher than it is today. The rollout of 5G technologies has already helped the company achieve healthy organic tenant billings in the U.S. over the past year, and it should continue to benefit as it's rolled out in more international markets in the coming years.
High barriers to entry due to the lack of available land for cellphone towers in high-demand markets, the high development costs, and the expertise necessary to operate in this industry make it difficult for smaller companies to break into the world of communications assets. Considering American Tower's huge portfolio and global reach, it's a surefire bet to meet the growing data needs in the decades to come.
2. The headwinds American Tower is facing are short term
Despite high demand and healthy growth in its revenue last year, its full-year and fourth-quarter 2022 net income declined. The REIT also forecast that its adjusted funds from operations (AFFO) per share, a metric similar to earnings per share for REITs, will decline by 2% in 2023.
This dip is thanks to rising interest rates increasing American Tower's cost of borrowing. Higher rates have hurt many REITs, but American Tower has been particularly hard hit because so much of its debt (22%) is floating rate. Because of this, when rates rise as they have since early 2022, American Tower's debt service costs adjust immediately. This is why the company is projecting flat or even negative growth for its FFO in the coming year despite healthy tenant bookings.
Rates were historically low at the start of last year, which is why the company took out a lot of debt. The company will eventually rework its balance sheet to adjust for higher borrowing costs and paid down 9% of its floating rate debt last year. Aside from this, it has a healthy balance sheet with debt ratios that fall in line with the REIT average (and are improving).
3. Its dividend is well covered
Another reason to believe American Tower can keep paying you for years is the company's long history of not just maintaining its payouts but increasing them. Since the company became a REIT in 2012, it has raised its dividend every quarter for 10 years straight. That's a total increase of 156% over the past 10 years.
AMT Dividend data by YCharts
The REIT recently declared its dividend for the first quarter of 2023, ending its quarterly increase streak. But the move was a smart one considering the high cost of financing it's facing. Its current dividend payout ratio as a share of its AFFO is about 66%. This gives the REIT plenty of coverage to maintain and eventually raise its dividend even in the high interest rate environment it's facing.
Considering it's got 10 years of consecutive raises under its belt, I don't think it's a track record it will give up lightly. It's very likely American Tower will raise its payout at some point this year. It will probably just be later in the year, once it has a better understanding of how rising rates are affecting its bottom line. The stock is trading at a favorable price right now (around 20 times its AFFO) compared to its historical average. And the dividend works out to a yield of more than 3%, higher than its historical average.
There's a chance its share price could sink more this year, but investors shouldn't wait around for a better deal. There's always a chance the stock performs better than expected and share prices increase as a result. Considering the company's dividend history, the fact that it has more than enough income to maintain and even raise its dividend, and the long-term demand for its assets, I believe American Tower is a stock worth buying at today's pricing.
