Artificial intelligence (AI) stocks are in the news constantly, and while the new technology has a lot of promise and potential, there are also a lot of barriers to overcome before it will truly be the universally embraced tool that Wall Street hopes it can be. AI needs chips, to be sure, but it also needs massive amounts of storage.
That's where a little data center real estate investment trust (REIT) called Digital Realty Trust (DLR 2.68%) comes in. Nvidia (NVDA 4.45%) is certainly benefiting from the explosion of AI by mass producing more purpose-built microchips, but without data centers, those chips are virtually useless for massive scale adoption.
For my money, it's Digital Realty Trust all the way. Here are three reasons why you should buy it before you buy Nvidia.
1. Digital Realty Trust is a better value for the money
Although investors don't generally use price-to-earnings ratios to evaluate REITs, it is one way to compare Digital Realty Trust directly to Nvidia. Even with the recent spike in Digital Realty Trust's stock price, it's still a way better value on this metric.
It has a P/E ratio of 44.99 versus Nvidia's 58.37, as of closing on Friday, Oct. 4. Digital Realty Trust's earnings per share is also much higher at $3.49, compared to Nvidia's $2.14.
In short, Digital Realty Trust is making more money per share than Nvidia, which makes sense because it has a lot less overhead. Instead of having to employ a lot of people, and hiring a lot of specialists who can design microchips, Digital Realty Trust builds massive server farms and rents out the space, giving it significantly less costs and a business model that can be scaled massively with relatively few additional ongoing expenses.
2. Digital Realty Trust pays a hearty dividend
Yes, Nvidia also pays a dividend, but right now, the forward dividend yield from a share of Nvidia is just 0.03%, so it might as well not be paying dividends unless you're investing tens of thousands of dollars at once. And you might be.
But, for smaller investors, or investors who are looking for a bigger direct return, Digital Realty Trust is still a real estate investment trust, which means it has to pay 90% of its net earnings to shareholders in the form of dividends. This is a requirement of this specific category of investments, it's not for manufacturing stocks.
The forward dividend yield for Digital Realty Trust is 3.1%, which is considered a high yield for REITs at the moment. So, on top of the potential for the stock to rise in value over time, you'll also get a significant quarterly dividend payout that you can either take and run off with, or reinvest into the stock to further grow your investment.
Digital Realty Trust's dividend has grown significantly since it was first paid out in 2005. It's grown from $1 per share to $4.88 per share in 2023. It's likely to also be $4.88 per share in 2024. That's 388% growth in dividends over 18 years, with absolutely no cuts to the dividend at any point, which is nothing to sneeze at.
Incidentally, since its initial sale in October 2004, the stock has grown in value by over 1,200%. This level of growth seems unlikely to continue, but the fact that the team running Digital Realty Trust has added so much value in that window means that it's doing a lot right.
3. Digital Realty Trust will benefit from AI growth every day
There's another elephant in the room when it comes to the Nvidia versus Digital Realty Trust argument. While Nvidia is providing the brains for the continued development of AI systems, it's likely to reach a point where it can't benefit a lot more, since all the companies developing AI will have all the chips they need, and will only be replacing them. At some point, Nvidia will need to find the next big thing.
Digital Realty Trust's peak is yet to be really realized or even identified. AI requires massive amounts of processing power, but it also requires massive amounts of storage for the information behind both that processing and the software's initial education. How many server farms will it take for every major company in America -- let alone the world -- to build their own internal AI system tweaked to their own needs?
In my opinion, the unrealized upside to Digital Realty Trust is not even measurable at this point, but as the AI revolution slows its growth, sales of chips will understandably slow to some degree. Digital Realty Trust has very few competitors in its field, so anyone else wanting to reap the rewards of this leap in technology is going to have a lot of catching up to do.
Nvidia versus Digital Realty Trust? I'm choosing Digital Realty Trust
I have been an investor in Digital Realty Trust for years, but I'd still continue to choose it over a lot of hot stocks, including Nvidia. Nvidia may have a lot of exciting things coming up in the near future, but I'm always looking for a stock that will just hang out and make money without a lot of fanfare for the long run, and I believe Digital Realty Trust is one of those.
