After a hotter-than-expected August inflation report, it is clear that the market volatility investors have become accustomed to this year is not done just yet.
The Dow Jones Industrial Average dropped a stunning 1,250 points on Tuesday in the market's worst day since 2020. With the return of volatility, investors might want to once again think about where they can invest their money for a steadier stream of income.
Dividend stocks are certainly one category that fits this need, as long as companies can maintain their payouts. If you are looking to make $1,000 of passive income, then buy roughly 211 shares of this high-yielding dividend stock.
A play on data real estate
A lot of real estate investment trusts (REITs) got hammered during the pandemic and are still struggling to recover because the real estate landscape has changed. But I see Digital Realty Trust (DLR 0.29%) as a superior type of REIT because it largely invests in data centers -- and data is the new gold, if you haven't heard.
Digital Realty has 4,000 customers all over the globe, including huge companies like Meta Platforms, AT&T, and JPMorgan Chase. The company has set up more than 290 data centers in over 50 major cities in 26 countries across six continents.
Recently, Digital Realty also launched ServiceFabric Connect, which CEO Bill Stein describes as "an open interconnection solution and orchestration platform designed to support the wider industry shift to a hybrid data-centric architecture." Essentially, with ServiceFabric, Digital Realty's customers will be able to link up with anyone at any time through this open-architecture digital marketplace.
The stock is down more than 33% this year but the company has generated $1.55 of funds from operations (FFO) per share in the second quarter of the year, which is only down about 13% from the second quarter of 2021. Core FFO in the first six months of 2022 is actually higher than in the first six months of 2021.
And despite headwinds from foreign currency exchange and higher interest rates, Digital Realty is still expecting to generate full-year core FFO in 2022 that would be 3.4% higher than in 2021 at the low end of management's guidance.
A solid and consistent dividend
To qualify as a REIT, a company must pay at least 90% of its taxable income out to shareholders in the form of dividends. Currently trading slightly below $117 per share, Digital Realty Trust pays an annual dividend yield of close to 4.1%. And this is a REIT with a really strong history of not only consistently paying a dividend but also growing it.
Image source: Digital Realty Trust.
Digital Realty does have more than $14 billion of total outstanding debt and current leverage of 6.2 times net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
But it seems pretty well managed with near-term debt payments more minimal. Also, most of this is fixed-rate debt, so the company's cost of debt won't increase that much as rates rise. In addition, because Digital Realty is so global, management has chosen to take a lot of its debt from different countries and in different currencies, so the company could actually benefit from things like the depreciation of the euro.
How to make $1,000 in passive income
Digital Realty definitely looks like a solid play on passive income, especially with the stock being hammered this year. Data is only becoming more important in our society.
Some investors, like the famous short-seller Jim Chanos, are betting against data center REITs, largely on the belief that cloud service providers will overtake data centers because they will want to build their own facilities in-house. But even if this does happen (and I don't know that it will), I still think Digital Realty will find plenty of customers for its services, especially if the company keeps innovating and building new solutions.
If you buy 211 shares of Digital Realty, which is currently trading at around $116 per share, that will give you a roughly $24,476 stake in the company. With an annual yield of roughly 4.1%, that will provide an annual passive income stream of about $1,003.
