Big Dividends From Big Data

By Aaron Levitt | November 04, 2013 AAA

As we continue to live more digital and technological advanced lives, the amount of sheer data we create is staggering. And it’s not just consumers. Businesses, governments and other organizations are churning out trillions of bytes worth of information daily. From picture and music files to credit card transaction info, data is ruling our lives.

Perhaps more importantly, most of that data is being stored in far off locals. The internet and cloud computing are now standard pieces of the modern world. Everything is done from a computer these days. Which means there are some pretty big bucks for those firms who operate all of those data centers. Not to mention their investors.

Big Time Growth

Anybody who has ever used Gmail or uploaded photos to Yahoo!'s (NASDAQ:YHOO) Flickr has used cloud computing. Retail consumers continue to adopt smartphones at a rapid pace and use apps for everything from music-sharing to finances. Meanwhile, various businesses and governments continue to focus on cost controls and efficiency. All of these factors push towards significant growth in cloud computing and internet usage.

That growth is spurring profits at the operators of various data centers.

So far, the companies that operate the various infrastructure making this of these apps and websites possible have seen their revenue more than double since 2008. The good times are expected to continue as analysts predict that these firms will see average revenue growth of 10% every year for at least the next four years.

The reason? Demand for data centers is still outpacing supplies of the critical tech infrastructure.

According to a paper by GE Capital (NYSE:GE), the total number of devices worldwide that are connected to the Internet is estimated to increase at a 15% compound annual growth rate (CAGR) during the current decade. That’s a big problem considering that the number of data center capacity is only scheduled to grow at a 3.6% CAGR between 2012 and 2016. That will help drive “rents” at the various firms that operate the warehouses of server computers and related-tech equipment.

Who To Bet On

While companies like Rackspace Hosting (NYSE:RAX) or funds like iShares North American Tech-Multimedia Networking (NYSE:IGN) have surged on the promise of the cloud computing and the internet of everything, the data center real estate investment trusts (REITs) have been hit hard on Fed’s taper worries. Mostly, because of investor abandoning risk and high yielding assets. However, given the longer term growth in the sector, now could be a great time to strike.

A prime player could be Digital Realty Trust (NYSE:DLR). The firm has seen its share price halved over the last 52 weeks as earnings haven’t matched its previously high multiple. Yet, today investors can get access to 127 properties with 23.7 million square feet worldwide. DLR continues to expand its reach via buyouts and deals. Shares of the data center operator yield a hefty 5.4%. That’s more than smaller rivals like CyrusOne (NASDAQ: CONE).

Investors looking for dividends can also check out both CoreSite Realty (NYSE:COR) and DuPont Fabros Technology (NYSE:DFT). The pair are smaller than DLR, but seem to growing at a quicker pace as utilization rates continue to rise. Both COR and DFT pay above 3% in annual dividends.

For those looking for the most growth from their data center investment, both QTS Realty Trust (NYSE:QTS) and Equinix (NASDAQ:EQIX) could be buys. QTS is a recent spin-off/IPO and debut as a public company. That provides investors with a ground floor opportunity. Meanwhile, EQIX is a monster data center operator who is in the process of converting to a REIT and will have status for the taxable year beginning Jan. 1, 2015. That’ll mean some hefty dividends once it full converts.

The Bottom Line

As internet traffic continues to skyrocket, the datacenter operators are poised to be a backdoor player in the growth of cloud computing and our data creation. Investor's looking for both growth and dividend, should give the operators of such facilities a serious consideration in their portfolios.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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