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.
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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.