In a sector that has a bunch of high flyers, Digital Realty Trust (NYSE:DLR) attracts relatively little attention. One reason for this, perhaps, is that the specialty real estate investment trust concentrates on data centers, not particularly one of the sexier segments of the property market.
But what isn't all that dull is the REIT's dividend, which was recently lifted by 6% to $0.83 per share for holders of record as of the close of business on March 14.
Payout up, sentiment down
The hike in payout didn't come as a thundering surprise. Digital Realty Trust is a habitual dividend raiser, having boosted its distribution more or less once every year since its initial public offering in October 2004. In the nearly 10 years from that time, the distribution has climbed from just over $0.15 per share to the current level.
If a REIT continues to lift its dividend, it necessarily follows that underlying fundamentals are improving. This is because in order to maintain their status, REITs are required to pay out at least 90% of their profits as dividends. Digital Realty Trust's results have reliably climbed upwards over the past few years, with revenues advancing at a sprightly clip (from $865 million in 2010 to $1.28 billion in 2012).
Meanwhile, funds from operations available to common stockholders, a key profitability metric for REITs, grew from $327 million ($3.39 per diluted share) to $558 million ($4.44) across the same span of time.
But more recent financial news hasn't been so cheerful. Digital Realty Trust's diluted FFO per share for Q3 2013, its most recent quarter, came in at $1.10. This was a dime below the average analyst estimate, and $0.12 below that of Q2. The company also lowered its projections of the same line item for fiscal 2013, to $4.60 to $4.62 from the previous $4.73 to $4.82.
The company's latest guidance isn't making too many mouths water. It's projecting a diluted FFO per share of $4.70 to $4.85 for 2014. Although that's higher than the expectations for 2013, if realized, it won't match the growth of previous years.
A delectable dividend
That recent uninspiring news has combined with general malaise in the REIT sector due in no small part to interest rate fears. With the Federal Reserve busy tapering its latest round of quantitative easing, investors worry that the regulator's pull-back from the bond market will drive up rates. This, in turn, will make traditional sources of real estate financing -- like bonds -- more expensive, draining profitability.
That, however, drives up the yield in combination with the dividend hike. Based on its latest closing price, Digital Realty Trust boasts a 6.2% payout. That's fat for the specialty REIT space; the admittedly limited data center segment generally doesn't pay out at all, with Equinix (NASDAQ:EQIX) and Europe-headquartered InterXion Holding both dispensing exactly $0. London-listed Telecity's yield hovers around 1%.
Widening the scope of specialty REITs, Digital Realty Trust's dividend more than holds its own. The yield beats that of successful medical properties niche players Health Care REIT (NYSE:HCN) and HCP (NYSE:HCP), at 5.6% and 5.8%, respectively.It also trumps well-in-the-black timberland REIT Rayonier (NYSE:RYN), with its current 4.4%.
The one to buy?
The popularity of REITs has dived in recent times, which provides a good buying opportunity for high yielders like Digital Realty Trust, which operate in profitable segments.
The world is going to continue to need data centers, so that market won't dry up anytime soon. Still, that deceleration in profitability is something to keep an eye on, and if it continues, the REIT won't be a great bargain, no matter how chunky that yield. The company is scheduled to unveil its Q4 results on Tuesday; we'll get a clearer picture then of where it might be heading.
Dividends to die for
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Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Equinix and Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.