The Smartest Dividend Stocks to Buy With $400 Right Now | The Motley Fool (2024)

With their share prices down 44% and 24% from their all-time highs, American Tower (AMT -0.27%) andTractor Supply (TSCO -0.64%) now offer investors the highest dividend yields they ever have, at 3.7% and 2.1%, respectively. Although a ballooning dividend yield can be dangerous to chase if the company's payouts are not sustainable, that doesn't appear to be the case for these two steady operators.

While things are far from perfect for either of these companies -- hence their struggling share prices -- American Tower and Tractor Supply could be two of the smartest dividend stocks to buy now with $400.

Here is what makes them so attractive at today's discounted prices.

American Tower: When a pause in raising dividends is a good thing

As the second-largest real estate investment trust (REIT) in the , American Tower -- with its 226,000 communications sites -- is arguably one of the most important stocks of our time. Currently, American Tower leases space on its towers out to wireless service providers, radio and TV broadcast stations, and even government agencies.

Naturally,Verizon,AT&T, andT-Mobile US are three of the company's largest customers, accounting for around 46% of its total revenue in 2022. This places American Tower's operations in a unique position to benefit from the continued rollout of 5G mobile networks and rapidly rising mobile data consumption.

To highlight how powerful the shift to 5G is for American Tower, consider that 5G users consume two to three times more data than their 4G peers. Thanks in part to the wider adoption of 5G, mobile network data has almost doubled in just the last two years. Making things all the brighter for American Tower, mobile data use per phone is expected to grow by an average of 18% annually through 2028 in mature markets like the United States, Germany, and Spain.

So why has the company paused its dividend hikes with these positive trends?

First, the company's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio has been hitting new all-time highs, and it's still rising.

AMT Financial Debt to EBITDA (TTM) data by YCharts.

Generally speaking, a debt-to-EBITDA ratio above 5 is considered risky. However, in American Tower's case, it has $62 billion in non-cancellable lease obligations on its books versus $39 billion in debt. So, while the company is more leveraged than most, it is not in immediate danger.

Second, the company's dividend payments temporarily grew larger than its free cash flow (FCF) as it doubled capital expenditures between late 2020 and today.

AMT Capital Expenditures (TTM) data by YCharts.

This left American Tower paying more in dividends annually than it was generating in FCF, making it wise to pause the payout increases until it can reel in spending. Currently, management is guiding for roughly $1.6 billion in capital expenditures in 2023, a respectable dip from its recent level.

Finally -- and tied to its rising debt load -- American Tower's decision to pause its dividend for a year makes a lot of sense after spending $10 billion to acquire CoreSite and its 28 data centers in 2021. While that deal certainly boosted the company's debt load, the addition of CoreSite's infrastructure could create immense value as those data centers combine with American Tower's wireless capabilities to create a behemoth in the edge computing space.

Trading at its lowest price-to-sales (P/S) ratio of the last decade and sporting its highest-ever dividend yield, American Tower could be a great buy as mobile data consumption continues skyrocketing -- even if the next dividend hike doesn't arrive until 2025.

Tractor Supply's repeat sales build stability over the long haul

Rural lifestyle retailer Tractor Supply may be one of the most successful investments many people have never heard of. Delivering total returns north of 54,000% since its initial public offering in 1994, Tractor Supply's footprint has grown to more than 2,200 stores, and management has its sights set on reaching 3,000.

Tractor Supply's 31 million-member-strong Neighbor's Club reward program has powered this incredible ascension. Its members, who account for 77% of the company's total sales, spend roughly three times as much as non-member customers, and create a steady, recurring revenue stream.

Adding further stability to Tractor Supply's sales, it generates most of its revenue from consumable, useable, and edible purchases. Livestock and pet sales accounted for 50% of sales in 2022, the vast majority of which were animal food and other useable animal items, such as bedding.

Despite the retailer's steady operations, the market has sold off Tractor Supply's stock in 2023 as revenue growth slowed 4% in its most recent quarter, and same-store sales declined by less than 1%.

As problematic as these results may seem, the company grew earnings per share by 11% thanks to increased share buybacks and improved profit margins.Lowering its share count by an average of 2% a year since 2013, Tractor Supply's stock buyback plan pairs beautifully with its well-funded 2.1% dividend.

Best yet for investors, its dividend yield is the highest it has ever been, yet it only uses 39% of Tractor Supply's net income for funding.

TSCO Dividend Yield data by YCharts.

Meanwhile, the company's price-to-earnings ratio has dipped well below its 10-year average and the S&P 500's current ratio of 25.

Posting its highest-ever member retention and customer satisfaction figures in its most recent quarter, Tractor Supply looks like a tremendous dividend stock investment at this discounted valuation.