If you are old enough, you remember a time when the internet didn't exist. You probably wouldn't want to go back, and no one who has grown up with the technology would want to get rid of it. Increasing demand for the internet and internet-tied devices seems more likely than a Luddite revolution, and that's why Digital Realty (DLR -0.39%) has such a great business. It's also why this dividend-paying stock will likely keep growing its disbursement for years to come.
Making it all possible
At its core, Digital Realty is a real estate investment trust (REIT). This is a business structure specifically designed to pass income on to investors, with REITs avoiding corporate-level taxation as long as at least 90% of their taxable income is paid as dividends. There are a lot of REITs, but most own things like apartments, offices, warehouses, and strip malls. Digital Realty owns data centers, another niche of the REIT sector.
Data centers are basically where the internet lives, and Digital Realty is a very big name in the niche. It owns over 300 data centers across the globe in more than 50 key metropolitan areas. It has more than 4,000 customers. With a roughly $30 billion market cap, it's also one of the largest publicly traded REITs.
Big and getting bigger
Digital Realty has played an important role as a consolidator in the data center space. It has made six sizable acquisitions since 2015. These deals have added roughly 100 data centers to its portfolio and helped to broaden its global reach. Being an industry giant helps to make such moves possible. You can't predict merger and acquisition activity, but Digital Realty will likely continue to use this approach to support its growth over time. And that will support its ability to keep increasing dividends.
In addition to buying whole data centers, Digital Realty builds them from the ground up. This is an ongoing process where the company builds a facility, leases it out, and when there's enough demand, it starts the process over again. There's pretty much always something going on within this cycle. But to give an example of the opportunity, within the REIT's Northern Virginia operations, it estimates that it has enough land to double the size of its business in this key global data hub. Such ground-up construction should also support long-term dividend growth.
Safe and secure
Business growth alone, however, isn't enough to support a steadily increasing dividend. So while Digital Realty has increased its dividend annually for an impressive 17 years and counting, investors will also want to look at dividend safety. One key metric is the adjusted funds from operations (FFO) payout ratio, which sits at a very comfortable 80% or so. Also supporting the reliability of the payout is a rock-solid balance sheet, which has earned an investment-grade rating. Simply put, there doesn't appear to be a material risk of a cut, financially speaking, which further suggests that business growth over time will lead to more dividend increases.
That said, perhaps the biggest caveat here is going to be the pace of business growth over time. For many years Digital Realty was able to expand at a rapid clip, but competition in the data center niche has picked up and large customers are increasingly able to demand better pricing. So while demand for data centers is likely to continue to grow in the future, Digital Realty's growth may not be as robust as it was in the past. As one of the largest players in the space, Digital Realty should be able to weather headwinds like these, but investors should monitor the industry trends just the same.
Bigger and better
Digital Realty's dividend yield is currently around 4.8%, which is historically high. And since the dividend looks more likely to keep growing than it is to be cut, that hints that now is a good time for long-term income investors to do a deep dive. If you do, you might find that this tech-adjacent REIT, and its growing dividend, fit well in your portfolio today.