Although I enjoy receiving dividend income, I have changed my investment strategy over the past few years. I initially focused on buying stocks with high dividend yields. However, after discovering remarkable data, I decided to invest in stocks that can increase their dividends.
This change in strategy paid bigger dividends than I expected. I earn higher total returns in part because of rapidly rising returns on my initial investments as the companies I own increase their payouts. One of the best examples of this in my portfolio is American tower (AMT 0.28%). THE infrastructure real estate investment trust (REIT) did a magnificent job of increasing its dividend. This gave a big boost to the dividend income I am now earning on this investment. With more dividend growth to comeI couldn’t resist the opportunity to add to my position recently.
Strong dividend growth
American Tower converted to a REIT in 2012 and started paying dividends. Since then, the company has increased its dividend payout at a compound annual rate of more than 20%. This rapidly increasing payout has really increased over the years.
I saw this first hand. I have owned shares of American Tower since its conversion to a REIT. Thanks to this, I have benefited from each dividend increase. This has resulted in a remarkable improvement in the return I earn on my initial investment. I bought my first shares at an average price of $47.32. American Tower initially paid a quarterly dividend of $0.21 per share ($0.84 per share annualized). It involves my dividend yield on this investment started at around 1.8%.
Fast forward to today, and American Tower is paying a quarterly dividend rate of $1.56 per share ($6.24 per year). As a result, I now earn a dividend yield of 13.2% on my initial investment in the stock.
Impressive total returns
When I first started investing, I probably would have overlooked American Tower, as it never really offered an attractive current dividend yield until recently. However, I redirected my focus from a company’s performance to its ability to increase its dividend. One factor playing a big role in my changing mindset is historical dividend stock yield data:
Dividend status | Average annual total return |
|---|---|
Dividend Producers and Originators | 10.2% |
Dividend Payers | 9.2% |
Equal weight S&P500 hint | 7.7% |
No change in dividend policy | 6.6% |
Dividend cutters and eliminators | 4% |
Non-dividend payers | (0.6%) |
Data source: Ned Davis Research and Hartford Funds. NOTE: Returns data from 1973 to 2022.
As this chart shows, companies that initiate and increase their dividends outperform the broader market and companies with static dividends (which tend to be those with higher yield payouts that they cannot grow).
Given this data, it’s probably no surprise to learn that American Tower’s rapid dividend increase has helped generate strong total returns over the years:
It outperformed the broader market in a very strong period for the S&P 500.
Why am I adding to my location now
Over the years, I have steadily added to my position in the US Tower to collect more of its growing dividend. I recently made another purchase.
A big driver is the sell-off in its share price over the past year. American Tower stock is currently about 30% below its 52-week high, weighed down by some growth-related headwinds it is experiencing. The sale pushed its current dividend yield up by more than 3%, near the highest level in its history. I couldn’t resist the opportunity to earn such an attractive yield on a stock that should continue to grow its dividend at an above-average rate.
Headwinds from rising interest rates, tenant issues and currency exchange will slow American Tower’s growth rate this year, which has weighed on its share price. However, the company expects these headwinds to fade and give way to the long-term tailwinds driving its business, including 5G and the growing use of data around the world. These catalysts position it for a reacceleration of growth in the future.
For this reason, American Tower plans to continue to increase its dividend. He plans to increase the payout by another 10% this year. While it may generate even slower dividend growth in the future, it should still have enough power to keep increasing the payout.
A juggernaut of dividend growth
American Tower has had solid dividend growth over the years. This helped generate strong total returns. Although it faces short-term headwinds, they are expected to fade going forward. For this reason, the company should continue to increase its dividend. With American Tower now also offering an attractive current yield, I couldn’t resist adding to my position in this premium dividend-paying stock.