High dividends are nice, but dividends combined with excellent long-term growth potential are even better. If you think a dividend yield of 6% from a stock with lots of revenue growth potential doesn't exist -- think again. Here are three stocks that fit the description that you may want to take a closer look at.
Recent Stock Price
AT&T (NYSE: T)
EPR Properties (NYSE: EPR)
Real Estate: Diversified
Iron Mountain (NYSE: IRM)
Real Estate: Storage
Data source: TD Ameritrade. Prices and yields as of 8/14/18.
A vast communications platform with lots of opportunities
Over the past few years, AT&T has grown tremendously with acquisitions of DIRECTV and Time Warner. Now, the company is the second-largest wireless carrier, as well as a major player in satellite TV, video streaming, and content creation. Trading for just over seven times earnings, AT&T is at its lowest valuation in years and could be worth a look.
AT&T's recent moves create tremendous opportunities for synergies and customer acquisitions, which could take a few years for the company to fully capitalize on. As an example, the company could entice competitors' wireless customers to join its ecosystem with discounted or even free HBO Now streaming service, as HBO is a part of the company's newly acquired Warner Media unit.
However, it's important to point out that AT&T is trading cheaply for a reason. The company has a rather large debt load of approximately $180 billion and its cash flow isn't quite as strong as its EPS suggests. Plus, there is the Justice Department's lingering challenge to their Time Warner acquisition. Even so, at just nine times 2018's expected earnings, the stock is valued as if it has little or no growth potential, and I simply don't think that's the case.
In a nutshell, AT&T stock has the stable income qualities of a bond, but with upside potential as well. Not only does it pay a well-covered dividend yield of more than 6%, but it has increased its payout every year for more than three decades.
Real estate for the next twenty years
Another of my favorite high-yielders is EPR Properties, a real estate investment trust with a unique mix of properties.
Specifically, EPR invests in three types of real estate -- entertainment properties (primarily megaplex cinemas), recreational properties (waterparks, golf complexes, etc.), and educational properties (charter schools, early childhood centers).
The first two property types -- entertainment and recreation -- make up roughly three-fourths of the portfolio and are an excellent play on the spending preferences of the millennial generation. The millennial age group (18-35) likes spending money on experiences, relative to previous generations, and are going to be gradually entering their peak earning years over the next couple of decades.
As a result, EPR's core property types have evolved significantly and are growing revenue rapidly. As one example, think of what the average movie theater looked like (and sold) about 20 years ago. Now, megaplex cinemas have more foodservice and beverage options, fancier seating, and other features that have created new and/or greatly expanded revenue streams. In fact, when EPR renovates and modernizes a megaplex theater, the property's revenue jumps by an average of 40%.
The same can be said for recreation property trends. For instance, instead of going to a no-frills driving range, we've seen the emergence of golf entertainment destinations like TopGolf (a major tenant of EPR).
The bottom line is that EPR Properties could be a great way to capitalize on the aging of the millennial generation over the next few decades, and I wouldn't be surprised to see the already-generous dividend yield grow significantly going forward.
In a class by itself
When it comes to long-term records and data storage, there's Iron Mountain, and then there's everyone else. With 95% of the Fortune 1000 as clients, the company is the undisputed leader in its core business.
In operation since 1951, but having converted to a REIT in 2014, Iron Mountain enjoys some of the best aspects of the self-storage business without some of its downsides. Like self-storage REITs, Iron Mountain has relatively low operating costs -- after all, storage facilities require far less maintenance and staffing than many other types of commercial properties. However, while self-storage facilities are rented on a month-to-month basis and tend to be very sensitive to the health of the economy, Iron Mountain's customers rent space on a long-term basis. In fact, the average item in storage at an Iron Mountain facility has been there for 15 years.
In addition to its near-monopoly in the records-storage business, Iron Mountain has been quietly getting involved in the data center business with several recent acquisitions. The need for secure and reliable space for servers and other equipment is growing rapidly, and with the exponential growth in the number of internet-connected devices, there's still lots of potential. While it's currently a minuscule percentage of the company's total revenue, I wouldn't be surprised if Iron Mountain's data center segment ultimately evolves into a major component of the business. After all, the company has the advantage of a brand name that's synonymous with security and reliability in the business world.
Iron Mountain has big ambitions to increase its earnings (and its dividend) over the coming years, and the growth potential is certainly there. So, although its current dividend is quite high, it could just be a starting point for the company's long-term income potential.
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