Digital Realty (DLR 0.67%) is in a select group. It's one of only a handful of real estate investment trusts (REITs) that has increased its dividends every year of its public existence. The data center operator last gave investors a 5% raise in March of 2022, marking its 17th straight year of dividend growth.

However, that streak might be in trouble. The data center REIT recently reported its results for 2022 and outlook for the coming year, which showed that its cash flow might not grow in 2023. Combined with its rising leverage ratio, Digital Realty might not be able to continue growing its dividend.

Headwinds are hitting the company's results

Digital Realty battled several headwinds last year. Despite those issues, the company continued to grow. Revenue increased by 6% to nearly $4.7 billion, while core funds from operations (FFO) per share rose 2.6% from $6.53 in 2021 to $6.70 last year. Core FFO would have been $6.91 in 2022 if it wasn't for the impact of foreign exchange fluctuations. Meanwhile, higher power prices and other costs caused its same-store cash net operating income (NOI) to decline by 5.8% last year. The company was able to offset those headwinds and grow core FFO thanks to a boost from acquisitions and development projects.

The REIT expects to continue growing this year. It sees revenue rising to a range of $5.7 billion to $5.8 billion, powered by improving rental renewal rates (up more than 3% in 2023 following 1.8% growth last year) and higher occupancy (85% to 86% in 2023 versus 84.7% in 2022). Those factors should drive same-store cash NOI growth of 3% to 4% this year.

However, despite all those growth drivers, Digital Realty sees core FFO per share ranging from $6.65 to $6.75 per share, or roughly flat with last year. That's due, in part, to the impact of higher interest rates.

Why the dividend growth streak could be in trouble

With its current dividend payment at $1.22 per share each quarter ($4.88 per share annualized), Digital Realty's dividend payout ratio would increase if it grew the payment this year since core FFO appears likely to stagnate. The company does have some cushion, given its current dividend payout ratio of around 72%. However, increasing the dividend would mean the company isn't retaining that cash flow to help fund new investments.

That could put pressure on the company's balance sheet. On a positive note, it does have strong investment-grade credit. However, leverage has been on the rise. Its net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio has risen from 6.1 times at the end of 2021 to 6.9 times at the end of last year. If its leverage keeps growing, Digital Realty risks a credit-rating downgrade, which would further increase its borrowing costs.

That's a concern, given the amount of capital spending the company has on the horizon as it continues expanding its global data center portfolio. Digital Realty plans to invest between $2.3 billion and $2.5 billion in development projects this year. While those expansion projects will help grow its cash flow in the future, the company needs to finance that spending. It's planning to fund that investment by issuing $1 billion to $1.5 billion in debt and selling between $1.5 billion and $2.5 billion of assets. That funding plan will enable the company to meet its financial obligations without selling the stock at the currently beaten-down price (shares have fallen nearly 30% from their peak early last year).

The streak could end this year

Digital Realty is in a select group of REITs that have increased their dividends each year. While the company likely wants to remain in that elite category, it doesn't want to risk hurting its financial profile. Thus, the company might not raise its dividend this year, or it may opt for a very small increase.

That would ensure it maintains the financial flexibility to navigate its current challenges and continue investing to drive future growth. Despite that lack of near-term growth, Digital Realty still offers an attractive dividend yielding 4.5%, enabling investors to get paid well while they wait for it to reaccelerate.