We are initiating a new small position in the Series J preferred shares of Digital Realty Trust (DLR.PR.J) for our Retirement Portfolio.
A few weeks ago, we published an article explaining why we thought REIT preferred shares had become increasingly attractive. REIT common shares have recovered substantially from their 2023 lows, with the broader equity REIT sector (VNQ) returning nearly 15% in the first half of 2026 alone, but many preferred shares have largely been left behind.
We think part of this disconnect is at least partially structural. Preferred shares are far less liquid than common equities, which makes it difficult for large institutional investors to deploy meaningful amounts of capital into them. When sentiment toward REITs improves, the common equity therefore tends to reprice first, while preferred shares remain more influenced by interest rates and retail income investors.
We are using this opportunity to increase our preferred equity exposure. At current prices, a number of high-quality REIT preferreds still offer yields in the 6-8% range, substantial discounts to their $25 liquidation preference, and much greater income stability than common shares, especially in the event of a major downturn.
Digital Realty’s Series J preferred is, in our view, one of the better combinations of safety and potential reward available today.
Buying Near The Bottom Of Its Historical Range
DLR-J currently trades at roughly $19.65 per share.
That is very close to its 52-week low and down sharply from trading above $23 a year ago.
At today’s price, investors are buying the preferred at roughly a 21% discount to its $25 liquidation preference while earning a current dividend yield of approximately 6.7%.
The reason for the large discount is not difficult to understand. DLR-J carries a coupon of only 5.25%. In today’s higher-rate environment, investors require a higher yield, which means the share price must trade below $25.
We therefore are not buying this with the expectation that Digital Realty will redeem the preferred anytime soon. It has already been callable since 2022, but redeeming 5.25% perpetual capital and replacing it with more expensive financing would not make sense.
Instead, we view this as a high-quality income investment with some potentially valuable upside optionality. We can collect roughly 6.7% while we wait, and if long-term interest rates eventually decline as we expect, the required yield on high-quality preferred shares should also decline. That could push DLR-J materially higher.
A return to $25 would represent roughly 27% capital appreciation from today’s price, on top of the dividends collected along the way. We are not underwriting a return to par, however. Even a recovery toward the low-$20s would produce respectable double-digit annual total returns when combined with the income.
