Digital Realty (DLR 0.67%) and Realty Income (O 1.46%) have treated dividend investors well over the years. Both real estate investment trusts (REITs) have increased their payouts every year since their public listings. They should be able to continue growing those payouts -- which both yield over 4% -- for the foreseeable future.
However, while they both offer high-yielding, growing dividends, some investors might only want to own one REIT in their portfolio. Here's a closer look at which one stands out as the better buy.
Realty Income provides steadily rising monthly income
Matt DiLallo (Realty Income): While I own Realty Income and Digital Realty, I can't seem to get enough of Realty Income these days. I've been buying shares of the REIT almost every month this year. The big driver is its attractive, steadily rising monthly dividend.
Realty Income recently delivered the 117th increase in its dividend since its public market listing in 1994. While it was a meager raise of 0.2% over the prior payout, the company has grown its dividend by about 5% over the past year. That's slightly ahead of its long-term growth rate of 4.4% since its public listing. The current dividend level gives Realty Income a 4.6% dividend yield at the recent share price, well above the sector average (over 3%) and the S&P 500 (around 1.5%).
I fully expect Realty Income to continue growing its dividend in the coming years. The REIT has a large portfolio of stable net lease real estate leased to high-quality tenants across over 70 industries.
Most tenants operate in industries resilient to economic downturns and the pressures of e-commerce. Meanwhile, the leases feature annual rate escalation clauses and make tenants responsible for covering maintenance costs, building insurance, and real estate taxes. All this means these properties supply it with steadily rising rental income.
Realty Income also has an excellent financial profile. It has a reasonable dividend payout ratio for a REIT (76.5% of its adjusted funds from operations in the second quarter) and one of the highest credit ratings in the sector. Those features give it the financial flexibility to continue acquiring income-producing net lease real estate. It expects to invest over $6 billion this year. Those deals should enable it to continue growing its attractive monthly dividend.
A growth stock in REIT clothing
Mike Price (Digital Realty Trust): What if I told you there was a tech company that has grown revenue by 40% over the last few years that also has a dividend yield over 4% and a strong asset base to support it through a crisis? Digital Realty Trust is that company.
Digital Realty is a data center REIT. The data center part of that term means it specializes in cutting-edge servers and cloud technology that it rents out to customers. The REIT part means it is required to pay 90% of net income to shareholders in the form of dividends.
This combo has led to desirable returns for shareholders over the past 17 years. The REIT has raised dividends each year, and the stock is up 834%. Fortunately for us, the stock may be a bargain now.
Interest rate fears, a strong dollar, and the REIT's close connection to the tech sector have led to a 36% drop in the stock price YTD. As Digital Realty booked $113 million of new annual rental income in Q2 and renewed $173 million, the stock was falling.
Rising interest rates are problematic for almost all REITs: They can't retain much of their earnings, so REITs usually fund expansion with debt financing. Digital Realty, however, has one of the better balance sheets in the industry, and the majority of its existing debt is priced around 2% or lower.
The strength of the dollar is a direct result of rising interest rates in the U.S. Once the EU and other international central banks raise interest rates to combat their own inflation levels, those currencies will increase in value as well -- it's unlikely that currency conversion will be a concern for longer than a year or so.
Finally, many tech stocks fell 60% or more this year because they traded at insane valuations. They reported earnings in years when the majority of the country was working from home, and those numbers were projected forward.
Digital Realty doesn't have that problem. Demand for its business is unlikely to change because of current market forces.
That means Digital Realty, which trades for 1.96 times book value, relative to a five-year average of 2.74, and about 16 times management's estimate of full-year constant currency cash flow, is cheap because of short-term, fixable issues. This could be the perfect time for you to invest.
Great options for income-seeking investors
Realty Income and Digital Realty have excellent dividend growth track records. Meanwhile, both should be able to continue growing their payouts in the future. That leaves investors with a difficult choice.
If you only want to own one REIT, Realty Income is the better buy if you're seeking passive income, given its monthly dividend. Meanwhile, Digital Realty stands out for those seeking a lower-risk, tech-driven growth stock at a value price.
