“Beating the Dow” means outperforming the venerable Dow Jones Industrial Average, that slowly changing collection of 30 large American companies that serves as a benchmark for the health of the economy.
While figuring out when to trade selected stocks versus simply buying an index fund that tracks the Dow is a time-consuming and challenging endeavor for many, you don’t have to search too hard for stocks that beat the Dow.
There are a number of well-established companies that have done just that over the years, including American Tower (AMT 0.81%), a cellphone tower pioneer that now supports wireless networks with about 225,000 sites in 25 countries on six continents.
This chart shows how American Tower has sharply outperformed the Dow, as represented by the SPDR Dow Jones Industrial Average ETF. The exchange-traded fund was established in 1998, the same year American Tower stock went public.
Becoming a REIT and turning on the dividends spigot
In 2012, American Tower became a real estate investment trust (REIT) and as such is required by tax law to pay out at least 90% of its taxable income to shareholders in the form of dividends.
The Boston-based REIT has been increasing its dividend every year since and now pays an annualized $6.48 per share, up nearly sevenfold over that time, and good for a current yield of about 3.5% at a share price of about $193. The Dow ETF, by comparison, pays an annualized $2.2476 per share, good for a yield of about 2% at a current share price of about $343.
American Tower’s dividend is well covered. That $6.48 per share is significantly less than the $9.72 to $9.85 per share in adjusted funds from operations (FFO) the company projected in its recent second-quarter earnings announcement, and its payout ratio based on cash flow is a modest 58%. It looks very sustainable.
So, what now?
American Tower does have thousands of customers around the world, but there is concentration risk in that a large percentage of its income is typically generated by the major mobile carriers. However, space on these traditional towers and a growing collection of small cell technology and data centers is adding diversity to the rent roll.
Many of the contracts to rent space on American Tower’s properties come with long-term leases and built-in escalators that helps ensure stable revenue that’s predictable and growing. Past performance is no guarantee that American Tower (or any other Dow-beating stock) will keep on doing just that, but there’s plenty of reason to believe it just might.
I’ve owned American Tower shares for a while now and plan to add to my stake when the time is right. The stock has declined about 9% this year along with the shares of many other REITS, so now may one of those times.