Everyone's Chasing AI Data Center Stocks. This 5%-Yielding Dividend Stock Already Owns a Piece of the Boom.

AI data centers are the hot investment theme today. From data center developers to chipmakers to power producers, it seems like everyone is chasing the AI data center investment trend. That's pushing up valuations, pulling future upside forward.

However, while everyone is bidding up almost anything related to AI data centers, they're overlooking a boring way to cash in on the megatrend. Realty Income (NYSE: O) already owns a piece of the data center boom. That positions the real estate investment trust (REIT) to continue to steadily grow its more than 5%-yielding monthly dividend.

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Cashing in on an over $1 trillion opportunity

Realty Income started investing in data centers in late 2023 by forming a build-to-suit joint venture (JV) with Digital Realty. It bought an 80% stake in a JV building up to 48 megawatts of data center capacity, secured by a long-term net lease with a large, high-quality company. The total build-out cost is up to $800 million.

The REIT recently inked an even bigger JV with Cloud Capital to invest in hyperscale data centers. The programmatic joint venture will initially hold over $6 billion in assets, with Realty Income expecting to invest up to $1.4 billion for a 45% stake in a three-asset Northern Virginia portfolio. The JV will provide it with the opportunity to invest in future qualifying data center developments and acquisitions in the U.S. and Europe.

These JV's position Realty Income to capitalize on the more than $1 trillion opportunity it sees for investing in global data centers. That's a massive opportunity for the $89 billion REIT (by enterprise value).

Accelerating growth

Realty Income's $6 billion hyperscale data center joint venture is already driving faster growth this year. The REIT is raising its outlook for adjusted funds from operations (AFFO) to a range of $4.44-$4.45 per share, up from its prior guidance of $4.41-$4.44 per share, a 4% increase from last year at the midpoint. It also raised its investment outlook to $10 billion, up from $9.5 billion.

That AFFO is plenty to cover the dividend. Realty Income expects to generate over $965 million in adjusted free cash flow this year after paying dividends. That gives it ample room to continue raising its dividend. It recently extended its growth streak to 115 consecutive quarters.

A lower-risk way to capitalize on the AI data center boom

Investors are bidding up everything related to data centers these days, including the stocks of companies that might not deliver enduring growth. Realty Income, on the other hand, isn't a speculative play on data centers. It's investing in facilities secured by long-term leases with top-flight tenants. That makes the REIT, which pays a more than 5%-yielding and steadily growing monthly dividend, a lower-risk way to cash in on the data center boom.

Matt DiLallo has positions in Digital Realty Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Digital Realty Trust. The Motley Fool has a disclosure policy.