Digital Realty (DLR 0.63%) is a real estate investment trust (REIT), and REITs are an investment class typically associated with income as much as price appreciation.
Had you put $1,000 of disposable income into this data center owner/operator just as the Great Recession was dawning, you'd have about $4,100 for your troubles and patience.
DLR Total Return Level data by YCharts
The chart above shows how handily Digital Realty stock has outperformed the S&P 500 since October 2007. And there's reason to trust this company to continue to reward investors as we roll through what many fear is the next recession (either here already or on the way).
Down but not out for this passive-income pump
This is one beaten-down stock. Digital Realty is now trading at about $92 a share, down a whopping 48% from its record high closing of $171.75 last Dec. 31. The malaise affecting the tech sector is a factor here, as are concerns about major clients such as Amazon and Google creating their own data centers.
Short-seller Jim Chanos, in fact, cited that new competition as his impetus for creating a fund to put hundreds of millions toward shorting REITs like Digital Realty and Equinix. But there's a lot to commend Digital Realty to buy-and-hold investors, especially those with passive income in mind.
For one, data center demand continues to drive the industry's growth even through these tough economic times. For instance, analysts at Technavio see the data center market growing by about 22% a year to about $616 billion through 2026, with 35% of that growth happening in North America. And Dodge Data & Analytics just said in its September construction trends report that data center projects entering the planning stage were helping drive its Dodge Momentum Index to near-record highs.
Digital Realty already has about 300 centers and 4,300 customers and is buying land and building new centers, or buying existing operations, or partnering with existing operators, in Switzerland, France, India, Ireland, Spain, Germany, Israel, and South Africa.
Now it's growing its own ability to deliver the kind of cloud and hybrid IT solutions that it says organizations of all sizes and geographies will be relying on to support their operations through carrier-neutral 5G networks now being rolled out around the world. That will generate rental income for the company and dividend income for its investors.
Dividend increases, the ability to fund them, a depressed share price -- it's time to buy
There's also a long record of shareholder return here. Digital Realty has raised its dividend for 17 straight years -- including by about 5% earlier this year -- and its stock is now yielding about 5.3% after hovering between 3% and 4% for the past few years. And that total return we highlighted above -- the one that turned one grand into four grand in 15 years -- is good for a compound annual growth rate (CAGR) of nearly 10%.
Meanwhile, Digital Realty has posted a 10% CAGR in the critical measure of funds from operations (FFO) since 2005 and is projecting FFO of $6.75 to $6.85 per share for 2022. That's down a bit from the $6.80 to $6.90 it projected at the beginning of the year, but with a quite modest payout ratio of about 42% (based on cash flow) and a penchant for punching up payouts, this REIT's record as a passive income outperformer looks good in the near term.
Another possible buy signal to me is its price/FFO ratio, currently only 9. All those metrics, and its growing portfolio in a high-demand industry, add to my confidence in the stake I already have in this stock. I'll be adding to it soon.
I didn't put $1,000 into Digital Realty 15 years ago, but I can do something about that now.
