DLR Stock: Earn a 7% Yield from the “Data Gold Rush”
Earn “Online Commissions” from Facebook
Today’s chart highlights one way to earn yield from the tech sector ranging from five percent up to even seven percent: “pick-and-shovel” businesses.
Regular readers have heard the concept of selling “picks and shovels” to a booming sector. Rather than betting the farm on a single project, these firms sell tools and services to an entire industry.
Case in point: Digital Realty Trust, Inc. (NYSE:DLR). This company owns hundreds of data centers across the country, leasing out terminals to online businesses. For a number of reasons, it’s the safer (and more lucrative) way to invest in the technology boom.
The digital revolution has sparked a data gold rush, for starters. Consider how file sizes have grown. Previously, a large text document like Stephen King’s classic novel Carrie might have taken up 521 kilobytes. Today, a high-definition movie like Rogue One: A Star Wars Story might top 30 gigabytes, or roughly 10-million times more file space.
Between the beginning of civilization and 2003, we only created five exabytes of data. We now make that much every few days. By 2020, analysts project the total data universe to grow threefold. (Source: “The Digital Universe of Opportunities: Rich Data and the Increasing Value of the Internet of Things,” IDC Research, April 2014.)
But while we can create information in the blink of an eye, where do we keep it all? Our demand for data has started to outpace flash and hard drive production. Even finding a physical place to store all of this hardware has become a challenge.
Digital Realty solves part of this problem. The company owns hundreds of data centers across the country, hosting servers and terminals for businesses and tech giants. These networks store, process, and transmit all of the information over the Internet. Every time you “like” something on Facebook Inc (NASDAQ:FB) or stream a movie from Netflix, Inc. (NASDAQ:NFLX), Digital Realty earns a small commission.
And those small commissions really add up. Last year, the company grossed $2.1 billion. Since 2005, the trust has grown profits by 14% annually.
That could be just the beginning. Through the next five years, “the Street” expects Digital Realty to increase earnings per share at a 40% annual clip. I can only think of a few businesses in the world generating these kinds of growth numbers.
For owners, that growth has created a cash cow.
Over the past decade, the distribution on Digital Realty common units has more than doubled. Today, these pay out $0.93 each quarter, which comes out to an annual yield of 3.3%.
Digital Realty preferred shares sport even better yields. These issues offer large, fixed distributions and pay out up to seven percent. For investors willing to sacrifice long-term growth for an upfront yield, they represent a compelling option.
|Digital Realty Trust, Inc.||
Digital Realty Trust Inc. 5.875% Cum. Redeem. Pfd. Series G
|Digital Realty Trust Inc. 6.35% Cum. Redeem. Pfd. Series I||
|Digital Realty Trust Inc. 7.375% Cum. Redeem. Pfd. Series H||
Source: Google Finance
The Bottom Line on DLR Stock
During a gold rush, most people go broke. Rather, it’s the companies selling the vital tools and services—food, jeans, equipment, etc.—that make the real money. They represent the safer, surer way to profit.
I don’t know which tech companies will come out on top. I do know, however, all of these businesses will produce vast amounts of data. Companies like Digital Realty Trust, Inc. that store and transmit all of this information could make a fortune, and while paying our lucrative dividends to boot.
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