Skip to main content

Digital Realty Trust(DLR-N)

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

Got $1,000? Here's a Brilliant Way to Turn It Into an AI-Powered Income Stream.

Motley Fool - Thu Aug 24, 9:20AM CDT

Artificial intelligence (AI) has the potential to significantly increase productivity. That's leading companies to rapidly adopt the technology. The productivity boost they get from AI could significantly increase their profitability, benefiting their investors.

AI applications need data to train models and generate outputs. Data centers could play a crucial role in supporting the technology. That plays right into Digital Realty's(NYSE: DLR) strategy.

The data center REIT should be able to continue expanding its data center empire, supporting its ability to pay its attractive dividend. That payout makes Digital Realty a brilliant way to generate passive income from AI.

The AI opportunity

Digital Realty's management team highlighted the AI opportunity on the company's second-quarter conference call. CEO Andy Powers commented that the market increasingly recognizes "the critical role data centers will play in support of both digital transformation and artificial intelligence."

The CEO further commented that "the global expansion of cloud computing, paired with continuous digital transformation of enterprises, underscores the escalating importance of both data and AI in shaping demand." Powers noted that Digital Realty is currently "collaborating with numerous clients on AI-focused requests for proposals and implementations."

The REIT believes it's in a strong position to capitalize on the growing need for data center capacity to support AI. It has a large-scale global data center portfolio, allowing it to cater solutions to its clients' needs.

Growing demand for data center capacity powered by AI would enable Digital Realty to sign more leases covering its existing available capacity. Further, it should cause lease rates to rise, allowing the company to secure higher rates as existing leases expire. These catalysts should enable the company to generate more income from its existing data centers.

Meanwhile, growing demand for data center capacity should provide Digital Realty with additional expansion opportunities. It has the land, relationships with utilities, and improving financial flexibility to capitalize on new development opportunities. Future data center investments will supply the company with incremental rental income.

Sit back and cash in on the AI trend

As a REIT, Digital Realty must distribute at least 90% of its taxable income to shareholders via dividends. The company currently pays them $1.22 per share each quarter ($4.88 annually). That gives the data center operator a roughly 3.9% dividend yield at its recent share price.

A $1,000 investment in Digital Realty would generate about $39 of annual dividend income at that rate. That's more passive income than investors earn from other AI stocks.

For example, Nvidia's dividend yield is only 0.03%, while Microsoft's is around 0.8%. At those rates, Microsoft would produce about $8 of annual dividend income for every $1,000 invested, while Nvidia would generate a mere $0.30.

Digital Realty's already more attractive dividend income stream would likely head higher in the future. In 2022, the REIT delivered its 17th consecutive year of dividend growth.

While the company has yet to increase its payout in 2023 due to some near-term headwinds and balance-sheet issues, it recently signed several joint venture transactions to shore up its balance sheet and give it the funds to execute its expansion strategy. Meanwhile, AI-powered growth could reaccelerate Digital Realty's earnings growth rate. That could enable the REIT to increase its payout in the future.

A smart way to earn income from AI

Digital Realty could be a major beneficiary of the AI revolution in the coming years. It could drive accelerated demand for data centers, enabling the REIT to grow its income faster in the future.

That would give it more money to pay dividends. It already offers a reasonably attractive payout, making it a brilliant way to generate passive income from AI.

10 stocks we like better than Digital Realty Trust
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Digital Realty Trust wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of August 21, 2023

Matthew DiLallo has positions in Digital Realty Trust. The Motley Fool has positions in and recommends Digital Realty Trust, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.