Forget Tech Stocks: The Real Estate Play That's Cashing In on AI
Key Points
Many investors chase AI chip and software stocks.
But data center REITs offer more stable returns and reliable dividends.
Digital Reality is a top player in that growing market.
- 10 stocks we like better than Digital Realty Trust ›
When investors want to profit from the AI boom, they generally gravitate toward chipmakers like Nvidia (NASDAQ: NVDA) or software companies like Palantir (NASDAQ: PLTR). They probably pay less attention to real estate investment trusts (REITs), which are buying up data centers, renting out the space, and paying out most of that income as dividends.
One of the largest data center REITs is Digital Realty (NYSE: DLR), which operates more than 300 data centers across over 50 metropolitan areas. It serves over half of the Fortune 500, and its top customers include IBM, Oracle, and Meta. Let's see why it's a reliable long-term play on the cloud and AI markets.
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Image source: Getty Images.
What does Digital Realty do?
Digital Realty is a triple-net-lease data center REIT, meaning its tenants are responsible for their own maintenance, insurance, and property taxes. Like other REITs, it must pay out at least 90% of its taxable income as dividends to maintain a lower tax rate.
From 2020 to 2024, Digital Realty's core funds from operations (FFO) per share -- a key profitability metric for REITs -- rose at a 2% CAGR from $6.22 to $6.72. For 2025, it expects its core FFO per share to rise 9%-10% to $7.32-$7.38. That will easily cover its forward dividend of $4.88 per share, yielding 2.9%.
Digital Realty has kept its occupancy rate in the mid-80s over the past five years, and it expects that ratio to expand by 100-200 basis points to 83.9%-84.9% in 2025. Its business continues to grow even as it streamlines its portfolio by divesting its older "non-core" data centers, which have less growth potential than its higher-growth hyperscale data centers.
Why is Digital Realty a worthwhile investment?
At $165, Digital Realty still looks reasonably valued at 22 times its trailing core FFO per share. For conservative, income-oriented investors, that lower valuation makes it an appealing alternative to the higher-growth AI stocks, many of which are trading at premium valuations. Its dividend could also become more attractive if interest rates continue to decline.
The market's demand for its AI-ready data centers should soar over the next few years as more companies scramble to upgrade their AI infrastructure to handle the latest AI applications. It might not be as exciting as Nvidia or Palantir, but its swelling backlog, budding network of partnerships and joint ventures, and overseas expansion should all support its long-term growth.
Should you buy stock in Digital Realty Trust right now?
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Leo Sun has positions in Meta Platforms. The Motley Fool has positions in and recommends Digital Realty Trust, International Business Machines, Meta Platforms, Nvidia, Oracle, and Palantir Technologies. The Motley Fool has a disclosure policy.
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