We’ve been searching for new buying opportunities, and right now there are 3 stocks on our short list. This article provides a high-level overview of each of these stocks and why we like them. We haven’t purchased any of them yet, but there could be new purchases coming soon. We like our current holdings, but we could trim or sell a couple positions to make room for attractive new opportunities.
1. Digital Realty Trust (DLR), Yield: 3.3%
This is a data center REIT. If you don’t know what that means, it’s basically where all the “cloud” data is stored. People and companies used to store all their computing data (files, pictures, reports) on their hard drives at home or at the office, but now they save them to the cloud via the internet. This has lots of advantage like:
- You don’t have to be at home or at the office to access your data. You can access it anywhere you have an internet connection such as your cell phone, your friend’s cell phone, or your kids’ computers, the public library, etc.
- If your home or work computer crashes, all your data is safe because it’s stored in the “cloud”
- You don’t have to worry about upgrading to the newest computer all the time because the companies managing the cloud do it for you.
- It’s inexpensive to save data to the cloud because of economies of scale.
We like Digital Realty now for three reasons: (1) The big growing dividend, (2) the business has a lot of room to grow, and (3) the share price sold off hard over the last week following some ridiculous (in our option) statements from a technology venture capitalist.
The Dividend
The dividend yield is currently 3.3% and has room for A LOT of continued growth. Here is look at the company’s growing funds from operations, or FFO, a common metric for measuring a REITs business.
As you can see, the dividend is well-covered by the growing FFO, and based on the business opportunities, we believe there is a lot more growth ahead (i.e. many more companies will continue to move to the cloud).
Recent Price Action:
As you can see in the following chart, DLR’s price took a big hit last week.
Basically, this speech at the Delivering Alpha conference spooked the market. We think the notion that data center REITs will soon become obsolete is absolutely absurd.
2. Kimberly Clark (KMB), Yield: 3.3%
A lot of you may be laughing that we’d even consider purchasing a boring “paper-making” company like Kimberly Clark, but our thesis is clear. This profitable business is NOT going away, the price is cheap, and the dividend is big, growing and safe. Here is a look at some of this company’s products
And here is a look at the stock price decline recently.
Stay tuned for more information from us on Kimberly Clark following our upcoming due diligence. This is looking more and more like a very attractive and very underappreciated, long-term, high-income, blue chip opportunity.
3. Uniti Group (UNIT), Yield: 14.5%
Uniti Group is basically a telecom REIT that pays a huge dividend. Your first thought may be that the telecom industry is ugly, and your second thought may be that anything that pays a dividend this high cannot be safe. It’s true this is a higher risk investment opportunity, but there are reasons to believe Uniti may have some very significant upside price appreciation ahead.
For starters, Uniti was created when telecom company Windstream (WIN) spun off some of its assets to a REIT in an attempt to unlock some value that the market was not giving it enough credit for. However, since the spin-off in 2015, Uniti has been working to diversify its business away from only Windstream assets.
True the “old-school” wireline telecom business is struggling big time. Companies like Frontier (FTR), CenturyLink (CTL) and Windstream (WIN) have been performing absolutely horribly, while the big boys (AT&T and Verizon) have been doing better (though not great) because of their wireless/mobile assets (and because they have more attractive wireline assets anyway).
Uniti has a low credit rating that was recently downgraded because Windstream’s credit rating was downgraded (remember, more than half of Uniti’s business is based on lease income from Windstream). However, Windstream has been taking significant steps to firm up its business (they eliminated the dividend to free up cash flow), and Uniti has been growing business with other non-Windstream telecoms.
We’ll be digging into Uniti deeper in the upcoming week, but our basic thesis is that Uniti may not be as risky as the market seems to believe. And there is a good chance Uniti’s dividend yield will shrink, but not because Uniti is going to cut the dividend, instead Uniti’s price may increase significantly. Stay tuned as we expect to have more to say about Uniti after completing our due diligence this upcoming week.
Our Current Holdings
As a reminder, you can view all of our current holdings here. We are excited about our current holdings and track record a strong performance (we’ve also been having a good September so far). However, we may soon trim or sell a couple positions to make room for even more attractive investment opportunities. Stay tuned.