Dividend stocks with high yields are great, as long as those dividends are sustainable. While there are no guarantees, I think American Tower (AMT -0.27%) and British American Tobacco (BTI -0.33%) are solid choices for those looking for lofty payouts and a reasonable level of safety. Here's why I recently bought both stocks.
1. American Tower
Amazon founder Jeff Bezos once said that one of the most important questions to ask is: What's not going to change in the next 10 years? As an investor, asking this question can guide you to stocks that are likely to perform well in the long run because they're not likely to be disrupted.
American Tower, a real estate investment trust (REIT) that specializes in telecom towers and other communication assets, is one such stock. One thing that's unlikely to change over the next decade is the ever-growing demand for mobile data. As consumers use their mobile devices to stream video, play games, and do other data-intensive tasks, wireless networks must keep up.
American Tower is in a prime position to benefit from this trend. The company provides the towers on to which wireless carriers install their equipment. Faster networks require greater quantities of and more advanced equipment. Meaningful competition, particularly in the mature U.S. market, is unlikely. The capital requirements to build a network of towers with meaningful scale is high, and a patchwork of zoning restrictions would make the whole process a nightmare.
While American Tower's business is stable, partly thanks to long-term and noncancellable leases, periods when wireless carriers pull back on capital spending can hurt growth. Now is one of those periods. The major carriers in the U.S. are finishing up their 5G investment cycle just as adding new subscribers is becoming more difficult and expensive. T-Mobile, for example, is laying off 7% of its workforce as it girds for a tougher fight for subscribers.
American Tower stock is down about 45% from its pandemic-era high as investors fret about slower growth. This decline has pushed the dividend yield up to nearly 4%, which is historically high for the stock. While dividend growth will likely slow down as the company grapples with weaker capital spending from the telecom giants, the long-term picture looks just fine. I've been adding to my position as the stock continues its descent.
2. British American Tobacco
Like every major tobacco company, British American Tobacco is managing the declining demand for cigarettes while investing in new categories like vaping devices. Cigarettes are still a wildly profitable business, but they are certainly not the future of the industry.
What sold me on buying shares of British American Tobacco was an experience I had recently at a concert. Legendary investor Peter Lynch popularized the investment strategy of "investing in what you know." At that concert, I saw how pervasive vaping has become across all age groups. People were openly vaping in the concert venue, which definitely was not allowed. I knew vaping was somewhat popular, but I had no idea how widespread the practice had become.
I invested in British American Tobacco the next morning. The company is making strong progress diversifying away from cigarettes, with noncombustible revenue reaching 16.6% of total revenue in the first half of 2023. It's working toward boosting its revenue from these new categories to 5 million pounds by 2025, which will help offset declining cigarette volumes.
Revenue from vapor products soared 35.5% year over year in the first half of 2023, driven by a 9% rise in volume and stronger pricing. The company claims a 46.7% value share of the vaping market in the U.S. with its Vuse products.
Lofty profits from the cigarette business are sustaining the company's dividend today, and noncombustibles are expected to begin contributing to the bottom line in 2024. British American Tobacco currently sports a forward dividend yield of nearly 9%. It's so high partly because the stock has tumbled into deep value territory. The price-to-earnings ratio sits in the single digits.
The transition from cigarettes to noncombustibles will certainly be a messy one, and there's no guarantee that vapor products will ultimately produce similar profit margins as traditional combustibles. But the demand for these new products is growing rapidly, and I'm willing to bet that the company will be able to sustain a respectable dividend in the long run.
