Digital Realty Trust, Inc. (DLR): A High Quality REIT Consistently Growing Dividends

While sales growth has decelerated over the last five years, Digital Realty has continued to earn a reasonable return on equity in the high-single digits. The company’s return is limited by its capital intensity and competitive nature of rental rates, but its profitability should be consistent.

Source: Simply Safe Dividends

As long as industry fundamentals remain positive and capital markets remain friendly, we believe Digital Realty’s dividend is in good shape from a safety perspective.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

DLR has raised its dividend every year since its IPO in 2004 and grown its dividend by about 13% per year over the last 10 years. However, as seen below, dividend growth has decelerated. The company most recently raised its 2016 annualized common dividend by 3.5%, marking its 11^th consecutive increase. Going forward, we expect dividend growth in the low- to mid-single digits.

Valuation

DLR’s stock has a dividend yield of 4%, which is below its five-year average dividend yield of 4.9%. The stock also trades at 18 times FFO per share. We think the company can continue generating mid-single digit income growth, which would imply annual total return potential of 8-10% per year.

We have enjoyed a total return of more than 40% since initiating our position in the stock last summer, and it’s hard to make a strong valuation case for the company today. These situations are difficult. Should we sell our stock or hold on?

Conclusion

At the end of the day, Digital Realty Trust, Inc. (NYSE:DLR) seems a bit overpriced today and we are not interested in adding to our position. However, data center fundamentals look strong, and we like the themes the company is benefiting from.

As long as Digital Realty is keeping its data centers occupied at favorable rental rates and capital markets remain healthy, we are content to keep collecting our quarterly dividend payments. We plan to hold Digital Realty and some of our favorite blue-chip dividend stocks for the long haul.

Disclosure: None