Freedom Buy

Dividend Growth Investing | Recent Buy | Financial Independence

Purchases for my FI Portfolio have been few and far between the last few years.  That's not for lack of opportunities or desire rather it had to do with our lives being on a roller coaster.  However, there's a light at the end of the tunnel as our main goal for this year is to get rid of all non-mortgage debt and then refocus our energy towards building up the portfolio.  

We aren't contributing fresh capital to our investments just yet as we're focused on getting rid of our non-mortgage debt.  *Should be gone before the end of the year!*  However, that doesn't mean that we're not able to make new purchases thanks to the dividends that keep rolling in from our other positions.

On September 5th I initiated a starter position in a company that I've been watching for a while.  I purchased 9 shares of Digital Realty Trust (DLR) at $122.50 per share.  The total cost basis, including commissions, came to $1,107.45 or $123.05 per share.

Digital Realty is a Dividend Contender with 14 consecutive years of dividends increases.  Digital Realty's most recent quarterly dividend payment was $1.01 per share.  That puts the YOC for my position at 3.28% and I can expect to receive $36.36 in dividends over the next year.

Due to this purchase my FI Portfolio's forward 12-month dividends are $6,495.19.

Business Overview

First off, Digital Realty Trust is a real estate investment trust or "REIT" that focuses on data centers.  Essentially they provide the real estate and technology/servers that other companies use to both store and access data.  Digital Realty has 145 operating properties  spread across the world.

The amount of data that's accessed and created each and every day due to the internet is staggering.  It's that demand that continues to grow that leads me to believe that the data center space that attracted me to Digital Realty as an investment.


As a dividend growth investor any potential investment must prove to me that they have the willingness and ability to "show me the money".  I judge that based on a company's history of both paying and growing dividends to shareholders.  As I mentioned earlier, Digital Realty has increased dividend payments for 14 consecutive years.

*A full screen version can be found here.

I like to examine the dividend growth rates over varying time periods.  Since many businesses see their operations ebb and flow this smooths out the dividend growth and can give an idea of how things could look in the future.

The 1-, 3-, 5- and 10-year rolling dividend growth rates can be found in the chart below.  

*A full screen version can be found here.

Managements' guidance for full year 2018 FFO/share was raised during the Q2 release in July to $6.55 - $6.65 per share.  Assuming management hits that target then the dividend is well covered by FFO with a payout ratio between 60.8% - 61.7%.


The valuation, using managements' FFO guidance, is decent but not exactly at a screaming buy level.  Based on the forward guidance the P/FFO, the P/E equivalent for REITs, is sitting around 18.5x - 18.8x for FY 2018.  Expectations are for FFO/share growth around 8% per year so there's room for my purchase to grow into its valuation.

Another very rough valuation technique is to use the Dividend Discount Model.  Instead of solving for the price with an assumed growth rate, for a quick and dirty valuation I like to solve it backwards by figuring out what kind of growth rate is required to justify my cost basis at the time of purchase.

Using $4.04 as the starting dividend, my cost basis of $123.05 and a 10% required annual return, Digital Realty needs to average at least 6.5% annual dividend growth in order to support my purchase.  That looks achievable considering management is expecting 8% FFO/share growth per year.


This wasn't the best value purchase that I've ever made; however, I feel it's a solid place to initiate a position.  Especially since I've been wanting to add Digital Realty to my FI Portfolio for several years now but didn't have the cash.  

The plan as of now is to reinvest all dividends back into more shares of Digital Realty and then look for opportunities to purchase additional shares around $105-$110 once we can start investing again later this year or early 2019.

What do you think of my purchase of Digital Realty Trust?  Do you own shares or are you interested in adding shares of the company to your own portfolio?