This Stock Yields 4.9% and Has a Dividend Safety Rating of “A”

Bruce H. left a comment in last week’s Safety Net column saying that Digital Realty Trust Inc. (NYSE: DLR) looks troubled. I couldn’t disagree more.

Digital Realty is a real estate investment trust (REIT) that operates server farms. Fortune 500 companies like AT&T (NYSE: T) and Verizon (NYSE: VZ) as well as smaller companies rent out Digital Realty’s shelf space or warehouses for their servers.

As you can imagine, companies need more and more data storage every year. As a result, these server farms generate a ton of cash.

[ad#Google Adsense 336×280-IA]Digital Realty is an active recommendation in The Oxford Income Letter.

It yields a healthy 4.9%, although Oxford Income Letter subscribers who got in when it was first recommended last year are enjoying a 6.7% yield.

We’re also up 42.5% on the stock in The Oxford Income Letter, but it fell hard on February 6.

That was the day interest rates spiked higher after a positive jobs report.

Higher interest rates can make REITs less attractive because they often borrow lots of money, which means their interest expense could go up, and higher-yielding stocks often move in the opposite direction of interest rates.

Despite the sell-off in shares, Digital Realty is hardly troubled, especially when it comes to the dividend.

Like most companies, REITs report earnings and earnings per share. But the key number for REITs is funds from operations (FFO). This measure of cash flow gives investors, who are often primarily interested in the dividend, a clearer picture of the company’s ability to pay the dividend.

Last year, Digital Realty generated $5.04 in FFO per share. It paid out $3.32 per share in dividends, for a payout ratio of 66%. I like to see payout ratios of 75% or lower in order to feel comfortable that the dividend is safe. That way, if a company has a rough year or two when FFO goes down, there is still a buffer before the dividend is likely in jeopardy. digital-realty-trust-inc-dividend-still-a-buy chart

Management said it expects FFO to come in at about the same level this year – between $5.00 and $5.10 per share.

So even if FFO stays flat in 2015, the dividend could still rise another 14% to $3.78 per share and still be within my comfort zone.

In fact, even though FFO is not forecast to rise this year, I believe the dividend will be increased.

Digital Realty has raised its dividend every year for the past 10 years at an average rate of 18% per year.

I don’t expect the dividend raise to be that high this year, but I wouldn’t be surprised at all with a roughly 7% increase.

With a 10-year track record of annual dividend raises and a comfortable margin between FFO and its dividend, Digital Realty’s dividend is not troubled at all.

In fact, it’s quite healthy.

Dividend Safety Rating: A

Good investing,

Marc

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Source: Wealthy Retirement