What if I could show you a technology stock that has delivered a total average return of 19.2% per year over the last five years, while the market has delivered a -2.3% average return? What if the stock also paid a current dividend yield of 3.8%?
Unless you are Apple Computer (AAPL) or a chosen few, tech stocks have not had a very good run over the last five years. Here is quick look at how some of the big names have fared during that time period:
5 Yr. Avg. Tot. Return
Microsoft (MSFT) 2.5%
Cisco (CSCO) -9.9%
Google (GOOG) 1.4%
Intel (INTC) 3.5%
Oracle (ORCL) 8.6%
Dell (DELL) -15.6%
Nasdaq (QQQ) 6.2%
Digital Realty (DLR) 19.2%
Wait a minute! Why is there a real estate stock mixed in with a group of well-known technology stocks? More on that in a bit…
The words technology stocks and attractive dividend yield are usually not used in the same sentence. Technology stocks, for the most part, are not known for their dividend yields. Here is a quick look at some of the big tech names and their current dividend yields.
Current Dividend Yield
Apple Computer 0.0%
Digital Realty 3.8%
Do you realize that without the dividend yield, Intel and Microsoft have gone nowhere over the last five years? In other words, there has been zero capital appreciation during that time period!
There is that darn Digital Realty stock again. Not only does it have the best average total return over the last five years, it also has the best dividend yield, but what does it have to do with technology?
This San Francisco real estate investment trust (REIT) engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. Its current portfolio consists of 75 properties, including 62 located in North America and 13 located in Europe.
Oh, I get it, the company rents its properties out to technology companies. It collects rent from them and passes along a lion's share of the taxable income (90%) to its shareholders. Sounds like a pretty good business model to me.
They must be doing something right. Check out these historical returns:
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Data from Best Stocks Now App
The stock has handily beaten the market over the last one, three, and 12 months. It has also clobbered the market over the last three and five years. Digital Realty Trust currently has a momentum grade of A- when compared against 2,818 other stocks and exchange traded funds.
Also take note that the stock was only down 11.3% in 2008, while the market was down 38.5%. In other words, the stock has a bit of a defensive nature to it.
While I track 2,818 stocks on a daily basis, I also have a database with just over 7,500 mutual funds in it that I grade on a daily basis. The REIT mutual funds have a very prominent position at the top of my mutual fund list right now. This is good info for you 401-k investors to know. The real estate related funds have been near the top of the heap for quite a while.
Now back to Digital Realty. The stock has a market cap of just over $8 billion, which places it in the mid-cap range. It is appropriate for those seeking income first and a little bit of capital appreciation if possible. Digital has certainly delivered that over the years.
I just hate to buy a stock for its dividend yield when it has not delivered any capital gains for years. I showed two such example earlier. I like some growth potential with my dividends. I don't want to just tread water.
While I love to look at performance numbers, I also take a close look at valuation. Performance without value is called momentum. Momentum investors in tech stocks got clobbered back in the years 2000-2001. Momentum investors in Single Family Homes, who bought at or near the top several years ago, are still licking their wounds. During those bubbles, valuation seemingly went out the window and then came back with a vengeance, wiping out many in its path.
While Digital Realty is not the cheapest stock in the market right now, it still offers fairly attractive upside potential along with its dividend yield:
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When I run my numbers on the shares of this REIT, I still come up with almost 70% of upside potential (counting the dividend) over the next five years. In addition to this, if the real estate market ever kicks into gear again, then we could see even more upside.
When I take performance, safety, and valuation into account, I come up with a stock that ranks number 143 overall. This represents the upper echelon of the overall market right now.
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With tech stocks turning defensive right now, what is wrong with a nice technology-related stock that pays a healthy dividend and has racked up some great total returns for investors over the years?
Disclosure: I am long DLR.