Climb This REIT for a 7%+ Dividend Yield

In the investment world, real estate investment trusts or REITs typically have above-average dividend yields due to their structure. These securities are required to pay out at least 90% of net earnings in the form of cash dividends. Given historically low interest rates, this is place where investors can search for high dividend yields. A company that fits that potential is Iron Mountain . Iron Mountain is a high-quality REIT embarking on a turnaround. In the meantime, the stock pays an attractive high dividend yield above 7%, which makes the stock appealing for income investors. Business Overview Iron Mountain, founded in 1951 and headquartered in Boston, Mass., is a storage and information management REIT. Its services include record management, destruction, fulfillment services, data protection and recovery, server and computer backup services, and safeguarding of electronic and physical media. Iron Mountain operates in North America, Latin America, Europe, and the Asia Pacific region. The trust trades with a $10 billion market capitalization. On Feb. 24, Iron Mountain reported fourth-quarter and full-year 2020 results for the period ending Dec. 31, 2020. Revenue of $1.06 billion for the quarter was down 2% from the previous year's quarter, but above what the analyst community had forecast. Iron Mountain's adjusted funds from operations (AFFO) came in at $0.66 per share during the fourth quarter, which was down 18% compared to the previous year's quarter. Adjusted funds from operation came in at $3.07 for the year on a per-share basis, which was up slightly versus 2019's $3.01. So far, the COVID-19 pandemic has not had a large impact on Iron Mountain's funds from operations, although revenues declined during the second and third quarters of 2020. For 2021, Iron Mountain has provided adjusted FFO per share guidance of $3.25 to 3.42, which would be a meaningful improvement versus 2020. We are forecasting $3.33 in AFFO for this year. Growth Prospects Iron Mountain has not grown particularly fast, with per-share results barely improving during the 2011 through 2020 stretch. However, from 2008 through 2020, the trust grew AFFO by a 3.6% average compound growth rate. This growth has been driven by several contributing factors. The first one is organic revenue growth, primarily through pricing increases. Iron Mountain has achieved organic revenue growth rates of ~3% in the past, and guides for organic revenue growth of 3% to 5% annually in the future. In addition, Iron Mountain has completed takeovers and asset purchases over the last couple of years, which drove revenue growth further. These acquisitions were partially funded via debt, which is why the trust has considerable debt. Acquisitions were also partly funded via equity, which is why Iron Mountain's share count has been rising steadily. As long as Iron Mountain's takeovers provide higher returns than its cost of capital, those acquisitions are accretive and beneficial for IRM's shareholders. Iron Mountain's management forecasts that its revenue could rise by up to 5% a year on an organic basis in the long run, and that EBITDA could rise by 5%+ annually. Due to the weaker growth rate during the last decade and during recent quarters, we use a somewhat lower estimate for Iron Mountain's long-term cash flow growth. We are forecasting 2% annual growth. Coming off of $3.33 in expected AFFO, this implies the potential for $3.68 in AFFO in the next five years. Recession Performance Iron Mountain's focus on secure data storage sets the trust aside from competitors in the storage industry by providing a unique focus. The trust is active in a range of geographic markets across the U.S. and internationally and plans to expand its international operations further. This geographic diversification, coupled with the fact that demand for its services is not overly cyclical, means that Iron Mountain is relatively resilient to recessions, which helps during the current crisis. During the last recession, Iron Mountain generated $2.01, $2.34, $2.72 and $3.03 in cash flow per share during the 2008 through 2011 stretch. In addition, the dividend was initiated during this time. In the latest crisis, earnings once again proved resilient, growing 2.0%. Dividend Safety Iron Mountain pays out a large portion of its cash flows to its owners in the form of dividends, as is to be expected with a REIT. Furthermore, the trust has increased its dividend regularly, although the dividend growth rate has slowed down in recent years. Here's a look at the company's payout ratio during the last decade: 2011: 28% 2012: 36% 2013: 40% 2014: 51% 2015: 67% 2016: 75% 2017: 77% 2018: 78% 2019: 82% 2020: 81% While the payout ratio has grown over the years, it is not overly high compared to your typical REIT. Moving forward you might anticipate the dividend growth rate to track AFFO growth over time. Valuation/Expected Return Based on the current share price near $35, a quarterly dividend of $0.6815 and $3.33 in expected AFFO, Iron Mountain is presently trading hands with a high dividend yield of around 7.1%, a 10.5 P/AFFO ratio and a ~74% payout ratio. The company's high yield could create additional income for baby boomer retirement investors and other investors looking to generate higher income from their investments. As noted above, if AFFO were to increase by 2% annually, you would anticipate Iron Mountain generating ~$3.68 in AFFO after five years. If the shares were to trade at 10.5 times earnings, this implies the potential for a future share price of ~$38.60. If the dividend were to grow by 1% annually, baking in a bit of conservatism, you would anticipate collecting ~$12.75 in cash dividends over the next five years. Added together you come to a collective value of ~$51.35. Against the current share price of $35, this works out to the potential for 8.0% annual returns. This is a satisfactory rate of return, particularly for investors looking for high income payouts. Final Thoughts While Iron Mountain is not likely to wow you when it comes to growth prospects, the consistency of the trust is noteworthy. In addition, IRM stock is modestly valued and offering a 7.1% dividend yield. Even without terrific growth or a change in valuation, this could mean the potential for strong total returns and an attractive dividend.

Climb This REIT for a 7%+ Dividend Yield

Given historically low interest rates, REITs are the place where investors can search for high dividend yields.

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