Time to check out another A.I. pitch… and this time it’s from The Wealth Advisory, which has been through a few editors over the years but is now edited by Jason Williams. If this pitch is anything like the past ones we’ve looked at from them, it’s going to be an exaggerated spiel about a dividend paying stock… but we shouldn’t prejudge, let’s dig in and see what we’re working with today.

It starts out with an aerial view of a massive facility, and the ad says…

“It could easily be the most valuable piece of real estate in the world right now…

“But it’s NOT a military base or a secret government lab.

“This compound is the epicenter of the blossoming $15.7 trillion AI revolution.

“Why?

“Because every time a person asks a question to ChatGPT or another popular AI chatbot…

“That query MUST pass through this facility before a response can be generated for the user.

“Think of it as the “tollbooth” of AI.

“Because in exchange for this service, the facility’s owner regularly collects a fee from the companies behind these apps.

“The AI “Tollbooth” collects a staggering $427.5 million in fees every single month…”

He throws in a chart, too, so he says that revenue is “surging” for this “AI Tollbooth”, and that they had something between $4.5-5 billion in revenue in 2022, up from about $3 billion in 2018.

And then we get another clue:

“Yet this AI “Tollbooth” isn’t allowed to keep all of the profits for itself…

“The government has recognized the potential AI monopoly held by this company.

“As a result, the AI “Tollbooth” is legally required to share a whopping 90% of its profits with individuals like you and me…

“These payouts have surged 116% over the past decade!”

Well, that’s both untrue and a decent clue… anytime an ad says “they must share 90% of the profits with you,” that means they’re almost certainly talking about a Real Estate Investment Trust (REIT). These are special tax-advantaged companies that primarily own real estate of some kind, and they don’t have to pay corporate taxes as long as they distribute 90% of what would otherwise be their taxable earnings to shareholders as dividends, and then eventually the government gets their cut that way through taxes on your dividend income. This structure has nothing to do with the government “recognizing the potential AI monopoly,” it’s a tax structure that was first approved under President Eisenhower and it was primarily designed to democratize real estate investment (you can argue about the intent, and the structure has changed some over the years, but none of it was “these companies are so powerful they have to pay out their profits”, that part is entirely a shift in tax liability).

But anyway, we also get a chart of the “tollbooth” payout growth, so we see that they paid out something near $1.25 in 2023 and about $1 in 2018. Looks like the “payout” has roughly doubled in 12 years, which is about 6%/year growth. That means the dividends that the shareholders of this REIT receive have grown faster than inflation, which is good, but that’s not a growth number which stands out in this era of AI mania.

And as so often is the case, they throw out an enticing “this is what you might earn” number…

“Giving you a shot at collecting up to $48,800 annually — regardless of what happens to the stock market or economy!”

And a few specific folks who sound like normal people, and who are collecting big payouts… here’s an excerpt from that bit…

“Dozens of Americans are already getting their cut…

“I’m talking about folks like Corey D., a 50-year-old salesman from California…

“He recently collected a staggering $39,645 payout from the AI ‘Tollbooth.’

“And then there’s Jeannie L., a former paralegal from Texas who received $53,588 courtesy of the AI ‘Tollbooth’…

“Or take Arthur W., a retired attorney from New York…

“He’s collected a smooth $48,800 in just a year from the AI ‘Tollbooth’….

“And then there’s 73-year-old David R.

“While most people his age are worried about their financial security, David rests easy.

“That’s because he’s collecting an average of $71,167 per month from the AI “Tollbooth.”

“Annually, that adds up to a mind-blowing $854,000!”

We’ll get back to that in a minute, but let’s see what other clues he drops…

“Time and time again, this strategy has handed significant gains to my readers…

“I pinpoint the firm that provides the ONE thing every other company in that industry relies on in order to grow.

“And that’s exactly why I’m writing to you today…

“Because I’ve discovered the one little company that emerging AI giants such as the company behind ChatGPT rely on for their apps to function seamlessly…

“And it’s the company that I refer to as the AI ‘Tollbooth.’

“This firm is the backbone of essentially every player in the $15.7 trillion AI industry.

“And so far it’s flown completely under the radar…

“But that’s not going to last forever.”

So you know it’s a REIT, and you have probably realized that what he’s talking about as those “AI Tollbooths” are data centers, the massive complexes that provide power and connection for thousands of servers. He does eventually get more specific about that:

“The AI ‘Tollbooth’ is one of the largest owners of data centers in America.

“This firm has invested BILLIONS into developing over 310 data centers worldwide, including this one I showed you earlier.”

So who are we dealing with here? Well, the world of “pure play” data center REITs has shrunk quite a bit over the past decade, as the smallish ones have been bought up, so it’s not exactly a long list to parse through… but this one is probably the best known of the data center REITs, Digital Realty (DLR). There are lots of ways we can confirm that, from the current dividend payout and revenue matching the charts to the number of data center properties owned, but we’ll just grab a screenshot from Google’s satellite view to match the complex Williams shared a photo of. Here’s the photo from the ad:

And here’s a screenshot from the Google Maps satellite view of the “Digital Loudoun I & II” complex owned by Digital Realty, which makes up about half of DLR’s footprint in the important Northern Virginia data center market.

You can review their Investor Presentation here if you’re interested in more of an overview… they have a global presence, and lots of joint ventures and partnerships that have been used to fund various projects, and they’re the second-largest (by market cap) player in the space… though they’re often preferred by income-focused investors, because DLR pays a larger dividend than the larger Equinix (EQIX). DLR gets about half of its revenue from North America, though they’ve expanded pretty dramatically overseas over the years, and their Northern Virginia area is where they have their biggest potential for capacity expansion (access to power and land).

Digital Realty has been through some challenging periods over the past decade or so, but has recently been doing quite well, improving cash flow and bringing down leverage, partly by partnering up with private equity for some of their projects. And data centers are inherently pretty attractive real estate investments, because they can lease out rack space to thousands of customers and pass along costs for connectivity and power, so they’re not locked into long-term money-losing leases… but they are still real estate companies, so they are somewhat challenged if there happens to be overbuilding at the same time that interest rates jump higher and increase their debt service costs, which is what seemed to be happening to these companies in mid-2022 and into 2023, until the enthusiasm for AI drove demand for data center space higher, as folks were looking to fill up racks with NVIDIA servers and try to catch up with ChatGPT.

Like most large data center owners who offer a lot of interconnection, they do have many of the big named tech companies as customers… but I’d say it’s a bit of an exaggeration to say that any of the big AI spenders, like Alphabet, Amazon, Meta or Microsoft, depends on Digital Realty specifically. Those firms are customers of almost everyone who owns data centers, but they also own — and are rapidly building — lots of massive data centers for their own use (Alphabet and Amazon each own more than 100 data centers, Microsoft more than 200 — there’s no standard size for these centers, so the number doesn’t matter that much, but they’re all building big “hyperscale” data centers as fast as they can).

Digital Realty has been a very solid investment for a long time — here’s the total return (including dividends) for DLR, in purple, compared to the S&P 500 (orange) and to their major competitor Equinix (EQIX, blue) over the past decade:

And yes, this is a REIT, and it is mostly owned by investors who are interested in dividends, with a bit of dividend growth. The total dividend paid over the past year was $4.88 per share, so the trailing yield is a little more than 3% at a $145 share price… though they have unfortunately not raised the dividend in a while, the last increase was in 2022, so they’re probably being cautious because they’re trying to bring down their debt and deal with higher financing costs… but like most REITs, they were a pretty steady dividend-growth company during the era of very low interest rates. Presumably they’ll look to get back to growing the dividend in the future.

But if you’re wondering, “where am I getting $48,000 from,” well, you’re doing a good job at thinking rationally. These teases from The Wealth Advisory love to throw out a bit income number… without telling you how much you would have to invest to get that income. With an annual dividend of $4.88 per share, well, it’s not so hard to do that math — you’d need to own about 10,000 shares to get that kind of income from DLR. And at $145 per share, well, again the math isn’t too challenging — to buy 10,000 shares, you’d need about $1.45 million. So that’s how you get $48,000 in income from Digital Realty — you buy $1.45 million worth of shares, and you collect your dividends. Assuming they pay out dividends at a similar pace in the future.

(They probably will, but the “government required” rule for REIT dividends doesn’t offer much of a backstop if business gets bad. Digital Realty was only required to pay a dividend of probably about $2.75 last year to remain in good standing as a REIT, that would have been roughly 90% of their taxable income, REITS almost always pay out much more than their taxable income as dividends, because they have HUGE non-cash depreciation charges for all the properties and equipment they build and buy, and instead of holding on to that depreciation to finance their maintenance, replacement, and growth, they tend to use debt and new share sales to finance growth and just pay out the excess cash flow as dividends… so last year, for example, DLR had $950 million in net income, but also had $1.7 billion in depreciation and amortization charges, so with all the other writeoffs and adjustments they had a total of $1.64 billion in cash from operations, and they paid out $1.52 in dividends, so they met their expansion costs by borrowing ($334 million in new debt, much less than they used to borrow in a year, and by issuing $2.2 billion worth of new shares).

And, of course, I always like to check on a few of those “regular people” they include in the ads… that “Corey D.” who got a $39,645 payout is Corey Dyer, who was the Chief Revenue Officer at DLR until he was terminated last Summer. I expect he has probably sold his shares by now, he was a pretty constant seller when he worked there, but he did own close to 10,000 shares at the peak, so that’s roughly the kind of annual dividend he would have gotten.

“Jeannie L., a former paralegal from Texas who received $53,588” would be Jeannie Lee, who was indeed a paralegal back in 2000, but was a high-powered corporate attorney after she graduated from the University of Michigan law school a few years later, and has been at Digital Realty for about a decade — she’s now the Executive Vice President and General Counsel. And yes, she most recently had 10,769 shares, even though she sells a chunk of her options and shares each year, and that would mean her annual dividend as a shareholder would have been close to $53,000. A LOT less than her salary as an executive, one presumes (she’s not high enough in the corporate hierarchy for her salary to be specifically disclosed), and her shares and options are currently worth about $5.5 million.

“Arthur W., a retired attorney from New York…” is presumably Arthur W. Stein, who was the CEO at Digital Realty until he was terminated in late 2022.

And one more… “73-year-old David R.,” who we’re told is collecting a “mind-blowing $854,000…” is almost certainly David Ruberg, who was another Executive VP at Digital Realty until he left the firm in mid-2022. He has actually passed away now, as of last November, but while he was still with the company he did own more than 200,000 shares, so his dividends would have been in that neighborhood.

So yes, executives at $40 billion companies often get lots of shares of stock as part of their compensation… and if they hold onto those shares (most sell at least some of their awards and options, if only to cover the taxes), they can build up so the dividends really add up. That doesn’t have anything to do with you as an outside investor, of course, if you want to get huge amounts of income you’ll have to buy your shares.

It’s not a bad idea, I think DLR is a little on the expensive side these days, and if you want growth then Equinix has been the better bet in the past, particularly given DLR’s failure to raise the dividend recently… but it’s not a path to fast income. The rewards from owning a stock that pays a moderate dividend, like most large REITs, come from many, many years of letting those dividends compound and grow, and you have to be willing to sometimes see the value of your shares drop. For a dozen years or more, REITs often provided better returns than the stock market, and with less volatility, though that has certainly been tested over the past year or so, as those 3-4% REIT dividends suddenly have to compete with money market funds that provide 5% yields… so what happens to big REITs like Digital Realty depends in part, of course, on the continued growing demand for data center space, and on a hope that everyone isn’t over-building data centers right now, but it also clearly depends on what happens with interest rates over the next year or two.

Sound like the kind of “AI Tollbooth” you want a piece of? Have other favorites in this space? Let us know with a comment below… thanks for reading!

P.S. Williams also teases some other “Special Reports” — and we can give you answers there, too… his “Plug-in Payouts” pitch is about similarly earning income through a real estate investment whenever an EV recharges. That’s mostly about some REITs that own shopping centers, I covered it most recently here. And he also offers up a special report called “Prime Profits: How Everyday Investors Can Piggyback on Amazon’s Record Sales,” which is similar to an ad that has been running for much longer than Williams has been at The Wealth Advisory — I’ve covered it many times, most recently a couple years ago, and that “special report” is almost certainly still touting ProLogis (PLD), the largest warehouse-owning REIT (indeed, the largest REIT in the world for most of the past few years).

Disclosure: Of the companies mentioned above, I currently own shares of Alphabet, Amazon and NVIDIA. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.