The stock market appears to be on a solid path to recovery. The S&P 500 has rebounded 5% since the start of 2023 and the Dow Jones Industrial Average is up 15%. No one knows if the market will continue in its upward trajectory, but investors looking for value buys in high-growth income stocks should lock in savings before the next bull market comes.
Dividend stocks are particularly favorable buys right now because when the market rebounds, yields will start thinning. And one dividend stock you definitely don't want to miss at today's pricing is Digital Realty Trust (DLR 2.68%). Here's a closer look at this company and why it's such a screaming buy today.
Dominating data centers
Digital Realty Trust is one of the largest providers of data centers in the world. With ownership or interest in roughly 300 data center facilities, the real estate investment trust (REIT) serves roughly 4,000 customers across a wide range of industries. Data centers help store, aggregate, and transmit data, keeping things like social media, streaming, cloud-based apps and services, virtual reality, 5G technology, e-commerce, and countless other services running smoothly.
Data center demand has been robust over the last decade. But the coronavirus pandemic ushered in an era of unprecedented demand as people and businesses transitioned to working from home. Companies that may not have been ready for technology adoption were forced to make technological moves, many of which rely on data centers to work. People were also home more often, doing things like video calls, streaming TV, and interacting on social media.
The pandemic also brought supply chain challenges. Things like the chip shortage made it difficult to deliver new facilities creating the perfect storm for high absorption and growing market rents. Demand is returning to more normalized levels but demand for data centers isn't stopping.
Long-term trends favor healthy demand for data centers
Most companies prefer to lease space from data center space operators like Digital Realty Trust rather than building or maintaining their own due to the high cost and complexity of operating a facility. But there are other drivers, too.
Power and land availability are also big concerns. There simply isn't enough real estate or energy in certain high-density markets for new developments, which is something customers want and need.
Latency speed increases the closer the data is to the consumer. Data centers use cross-connections to transmit data among facilities in different metropolitan areas, meaning customers benefit from having a wide network of cross-connections between facilities. Digital Realty Trust has facilities in over 50 metro markets across six continents with 188,000 cross-connections. And it is expanding rapidly.
In late 2022, the company completed the acquisition of South African data center operator Teraco, which expanded its portfolio by seven assets. This acquisition's impacts should be reflected in company's fourth-quarter earnings 2022 earnings, which it will release on Feb. 16. It's also expanding its partnership with Hivelocity, adopting one of its interconnection solutions to further support its customers' needs, and has improved its data center efficiency in its Singapore, Hong Kong, and Sydney facilities.
Through the third quarter of 2022, all key metrics from the company were up compared to the year prior, which prompted the company to increase its full-year guidance.
Its price is favorable but rising quickly
The stock is trading around 16 times its projected constant-currency core funds from operations (FFO) at the time of this writing. This metric works similarly to the price-to-earnings (P/E) ratio and gives investors an idea of if it's favorably or richly valued. Digital Realty Trust prior to the recent market correction was trading upward of 20 times, meaning today's pricing is a discounted value.
The stock has already rebounded 11% since the start of 2023 but remains down 25% since last year. Projections for the 2023 data center market are quite bullish, and there's a good chance price growth will keep going. Either way, the stock is a great long-term dividend stock. The data center REIT has 18 years of dividend increases under its belt and plenty of coverage for its very attractive 4.4% yield -- which is nearly 3 times the average yield of the S&P 500.
