Iron Mountain Inc: This High-Yield Stock Now Pays 7%
April 9, 2019
The Best High-Yield Stock Nobody Has Heard Of
Wall Street has started to catch on to the best high-yield stocks nobody has heard of.
The past few years, I’ve urged readers to study a little-followed group of businesses I consider “cash cows.” Large investors generally ignore this area of the market, but for dividend investors, it’s an extraordinary place to shop for high-yield stocks.
These companies represent mature businesses. Because they have less in the way of growth potential, management has no reason to invest in new factories, plants, or equipment. For this reason, executives pay out most of their cash flows to shareholders. And as a result, it’s not uncommon to see these stocks pay yields as high as 21%.
It appears this opportunity won’t last forever, though. Recently, research analysts at Bank of America initiated coverage on one of my favorite such cash cows: Iron Mountain Inc (NYSE:IRM). I’ve also noticed the company getting more attention in the financial press.
Iron Mountain Inc specializes in storing documents and other valuables for corporate clients. The company operates more than 1,400 facilities worldwide totaling some 85 million square feet. To put that number into perspective, that’s enough space to hold 600 Costco Wholesale Corporation (NASDAQ:COST) stores laid end-to-end.
And those operations gush cash flow. Over the past decade, Iron Mountain has earned an average of $0.15 annually on every dollar of debt and equity invested into the business. I can only name a handful of other companies that have sustained such high profitability over that period.
Iron Mountain owes its success to a business characteristic analysts love: high switching costs. Customers pay storage fees between $0.10 and $0.22 per cubic foot per month. Retrieving documents, however, comes with a one-time fee of $1.65 to $2.77 per cubic foot, in addition to the expense of transporting cartons to a different facility.
For this reason, most customers opt to roll over their rental agreements year after year. As a result, Iron Mountain boasts a 98% retention rate. The typical document stays at one of the company’s facilities in storage for more than 15 years.
Better still, management spends little to sustain those cash flows. Iron Mountain’s facilities amount to dull, grey warehouses on the outskirts of cities. They require little in the way of investment on fancy amenities like fixtures, manicured lawns, or luxury appliances.
As a result, most of the company’s revenues gets paid out to shareholders. Since 2010, Iron Mountain’s payout has increased more than tenfold. Units pay a quarterly distribution of $0.61 apiece, which comes out to an annual yield of almost seven percent.
Most people who want to earn dividend income turn to buy well-known staple stocks, like Procter & Gamble Co (NYSE:PG) or The Coca-Cola Co (NYSE:KO). The problem with these companies? Everyone already knows about them. Because these stocks rarely trade at bargain prices, we can never earn a decent yield.
But I’d bet not one investor in 100 has heard of Iron Mountain Inc. The company has a lot of the same characteristics of popular dividend-payers like P&G and Coca-Cola. It just happens to be much smaller. And because document storage has about as much excitement as doing your taxes, units don’t get much coverage in the press.
I have urged paid subscribers of my Retirement Riches newsletter to consider Iron Mountain and other cash cow dividend payers for a while. Many of those stocks still trade for great prices and offer far higher yields than popular alternatives.
But I’m seeing more Wall Street analysts covering these businesses. Retail investors have also started to catch onto the income opportunity available here. If you’re interested in this kind of income, I suggest giving cash cow dividend stocks like Iron Mountain Inc a second look.
