If you’re looking for a lower-risk AI name that offers reliable dividend income while the underlying company is catching a major secular growth tailwind, put Digital Realty Trust (NYSE: DLR) on your radar — if not in your portfolio — while you can plug into it at a forward-looking dividend yield of 2.5%. Here’s what you need to know.
What’s Digital Realty Trust?
In simplest terms, Digital Realty Trust rents remote, cloud-based access to its artificial intelligence data centers to companies that can’t or don’t want to build one of their own.
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That’s not the crux of the bullish argument, though. While industry observer Precedence Research expects the global AI data center market to grow at an average yearly rate of 27.5% through 2034, what makes Digital Realty so unique is its structure, and how that makes it such a fantastic (and somewhat rare) dividend-paying name within the technology sector.
See, Digital Realty Trust is a real estate investment trust, or REIT, for short. That just means it collects recurring rental income, passing most of its profits to shareholders in the form of a dividend before they’re taxed at the corporate level.
Although this business structure is usually used by owners of apartment complexes, malls, office buildings, and other real estate, data centers that rent or lease remote access to their servers can also use this corporate structure that’s ideally suited to turning recurring income into recurring dividend payments.
And the company has done just that. Since 2005, following its 2004 founding, it’s paid a quarterly dividend like clockwork, passing along a piece of its quarterly profits.
Not the red flag it seems to be
There seems to be something of a “catch” with its recent cadence of payments. That is, after 17 consecutive years of annual increases, the company stopped raising its dividend payments in 2023. That’s when the artificial intelligence revolution really took off, requiring heavy investments in infrastructure to ensure a prominent presence in the industry’s future. Digital Realty opted to retain some of its profits at that time to invest in its own growth, holding its annual dividend payout at $4.88 per share ever since.
Just don’t lose sight of the bigger picture. Digital Realty Trust’s added infrastructure has allowed it to grow at a time when expanding a physical footprint is arguably more important than raising dividends. Last year’s top line improved 10% to $6.1 billion, and the company’s off to a similarly paced start this year, with analysts calling for comparable growth all the way through next year.
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