Here’s a high-growth tech stock that pays a reliable dividend
There are some stocks that can produce a great combination of growth, income and reliability, and Digital real estate trust (NYSE: DLR) definitely falls into this category. In this fool live Video clip, recorded September 23, Fool.com contributor Matt Frankel, CFP, explains why investors should take a closer look at this tech-driven real estate company.
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Matt Frankel: It’s AI [artificial intelligence] market: the entire AI software market. In 2020, you could see us at just over $ 22 billion. By 2025, it is expected to grow to around 6 times its size to reach $ 126 billion. You said that the data center revenue from Nvidia is up 124% year over year. But that might just be a starting point when looking at a chart like this. That’s why I wanted to talk about my stock, which is Digital Realty Trust, the ticker symbol is DLR. It is one of the largest real estate companies in the world. I mentioned that I’m a real estate guy, so I’m going to approach AI from a real estate perspective.
Data centers, if you’re unfamiliar with them, think of them as the physical homes of the Internet. Whenever you upload a photo album to your Facebook or you download content from Netflix or access a website or have a Zoom meeting like we’re doing right now, all of that content has to physically live somewhere, and that’s where data centers come in. These are secure and reliable places where businesses can host network equipment.
Data centers, for example, will say they have something like 99.999% uptime. I don’t know about you, but my internet is not working 99.99% of the time. So that’s a big selling point for these big tech companies who need their product or their websites to be available 100% of the time or very, very close to it. Digital Realty is one of the largest real estate companies in the world. Their market capitalization is around $ 46 billion.
They have 291 data centers around the world. Most of their largest presence is in the United States, but they are also the large European presence and a large Asian presence. They’re building these massive facilities that are designed to be always on when it comes to internet service, really secure environments that can’t be hacked, I guess you would say. They’re renting out their space, and just to give you an idea I’m going to share my screen again, so stick with me on that screen sharing and stuff.
These are Digital Realty’s top 20 clients. They have over 4000 clients. About half of their income comes from their first 20, so it’s worth highlighting. Very heavy business. Some of their clients won’t let Digital Realty say who they are, including number 1, you see this Fortune 50 software company. There are really so many software companies in the top 50, you could probably narrow it down if you really wanted it. Nos 2 and 3, IBM, Facebook, Oracle, big customer to them. One of the really interesting points, if you look at # 6, Equinix, it is the largest data center provider in the world. They rent space from Digital Realty. Cyxterus is the third largest data center provider in the United States, the daily space of Digital Realty. The financial industry needs a lot of server space. You see JPMorgan Chaseis in their top 20. Verizon and AT&T, obviously they have a lot of data going around the world, they need a lot of space to put it.
This is what data centers do. I don’t really want to get too deep into the weeds on how they work. I noticed people’s eyes were wide when I said things like co-location and cross-connect and things like that. But that’s the basic idea. As I mentioned, Digital Realty is the number two data center company. Equinix is number 1. Digital Realty is my preference as they own most of their data centers. You see Equinix rents them a lot of space. Cyxtera rents them a lot of space. Digital Realty owns 86% of its data center properties. Especially with some of its overseas data centers like in Asia, it uses a lease and sublet model. But there is a ton of potential here.
The volume of data circulating in the world has just grown exponentially in recent years. Think about the number of connected devices in your home today compared to 10 years ago. I look at my home office and can see a vacuum cleaner, a doorbell, a printer. All of these things that are connected to the Internet, and all of them have data going in and out of them. This trend has only accelerated in recent years. Thanks to data-rich markets like autonomous vehicles, like augmented reality and like artificial intelligence, where a large part of Digital Realty’s revenue comes from. Artificial intelligence devices use tons and tons of data. It will only get more sophisticated as the 5G rollout continues in the United States
Digital Realty’s performance so far has been very impressive. I know [Motley Fool contributor] Rachel [Warren] mentioned that Nvidia is a lower risk way to gamble in the AI market. This is also good, and it is also a good solution if you are an income investor. Digital Realty, because it is a real estate stock, known for its high dividends, currently pays a 3% dividend yield. The company went public in 2005. It has increased its dividend at an average rate of 10% per year since 2005. Initially it paid $ 1 per year, now it pays almost $ 5 per year. Not only is this a great stock of income, but it gives you increases over time.
If I was any closer to retirement, I would really, really love this stock. It’s not just about dividends. Their space has become much more valuable over time as the need for secure places to transmit data has increased. Let me just show this, last screenshot, I promise. It’s Digital Realty. If you think real estate is boring, think again. It’s Digital Realty against the S&P since its IPO in 2005. Digital Realty has generated a total return of 2,500% to investors in approximately 17 years. This is a sustained 21% annualized return over this period.
It’s not due to one or two big peaks. You see it’s a pretty steady return over time. The orange bar is the S&P, so it has generated more than five times the return of the S&P since its IPO in 2005. It’s pretty much a direct bull market for the past 11 years. A truly impressive track record. He’ll be a dividend aristocrat once he’s old enough. You have to be there 25 years to be a Dividend Aristocrat. Just a great way to play AI from a growth and revenue perspective.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP owns shares of AT&T, Cyxtera Technologies, Inc. and Digital Realty Trust. The Motley Fool owns shares and recommends Cyxtera Technologies, Inc., Digital Realty Trust, Equinix, Facebook, Netflix, Nvidia and Zoom Video Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.