The internet is here to stay, and that is why Digital Realty (DLR 0.67%) has such a bright future. That's also why the company has already amassed a 17-year streak of annual dividend increases. Here's why it's highly likely to achieve Dividend Aristocrat status, and why investors will probably want to consider jumping in before it does.
1. An important business
Digital Realty is a real estate investment trust (REIT). Owning physical property would seem, on the surface, to be as far from the internet as you can get. But this landlord owns data centers that warehouse vast banks of computers, which is kind of where the internet lives in the real world.
Image source: Getty Images.
It's a big player in the sector, too, with more than 4,000 customers across 300 locations spread around the world, including key hubs in the U.S., Europe, Africa, and Asia. As long as the world continues to use the internet, Digital Realty's data centers will be important.
2. External growth
The next big thing about Digital Realty is that it is a notable industry consolidator. It has made six major acquisitions since 2015, expanding its footprint by more than 100 properties. It has used these deals to materially increase its presence in the U.S. and Europe and to enter new markets, like Africa. The most recent deal, worth $1.2 billion, was earlier this year. Acquisitions are impossible to predict, so don't go in here expecting that Digital Realty will sign another deal tomorrow. However, it has successfully expanded by buying other companies, and it will probably continue to do so in the future.
3. Building from the ground up
The REIT doesn't just buy things, it also builds things. For example in the third quarter of 2022 management said that it had purchased four assets that it believes it can turn into data centers. The list includes locations in Paris, Stockholm, Greece, and Dallas. This provides a platform for internal growth to complement the company's acquisition activity and support dividend growth.
4. Nearly there
As noted above, Digital Realty has increased its dividend for 17 consecutive years. This shows very clearly that the company is focused on returning value to shareholders via a steadily increasing dividend. And it puts the REIT just eight years away from being a Dividend Aristocrat. Unless something material changes, it seems likely that the board will continue approving dividend hikes.
5. Solid as a rock
The positive outlook for dividend increases is improved by the fact that Digital Realty has an investment grade-rated balance sheet. That should give it the financial strength it needs to muddle through tough times. It also has a huge $30 billion market cap, making it one of the largest REITs in the world. That should give it the heft to keep swallowing up smaller competitors, and provide easy access to capital markets to support external and internal growth.
6. Ample coverage
Last but not least, Digital Realty's adjusted funds from operations (FFO) payout ratio is around 80% or so. That provides an ample cushion against adversity should times get tough, and giving it the capacity for future hikes. On that last front, the dividend has grown at a generous 10% annualized clip since 2005. So dividend growth investors will find it just as attractive as those seeking a decent return -- and the 4.5% dividend yield on offer today is well above the market average.
Best of both worlds
Digital Realty is well on its way to becoming a Dividend Aristocrat, and there's no reason to doubt it will get there. And while the dividend yield has been higher in the past, it is currently toward the high side of its historical range. That suggests that the REIT is both trading at an attractive level and offers strong dividend growth prospects. If you have been interested in the data center sector, it could be a good time to consider adding Digital Realty to your portfolio.
