The Pull of Big Data’s Iron Mountain

Investors chasing the highest dividend yields are liable to fall for lots of value traps.

Slumping stocks with high apparent yields scooped up at deep discounts often prove no bargain, as dim business prospects responsible for the initial slide get dimmer still.

Take CenturyLink (NYSE: CTL), the highest-yielding component – by a long shot – of the S&P 500 U.S. large-cap index.

Four months ago, the stock was above $25 and yielding an attractive 8.4%, for those willing to overlook the protracted revenue decline at the legacy telecom provider.

The payout hasn’t changed, and the stock now yields a prospective 11.4%. But that’s about the only consolation for investors who are down as much as 29% since June even after pocketing the fat quarterly dividend.

Perhaps the recent merger with another broadband provider will help CenturyLink preserve its payout. But its recent business trends and the history of other companies in secular decline make that a dicey proposition.

Investors haven’t fared much better of late in S&P stocks with the next four highest dividend yields. Macy’s (NYSE: M), Seagate Technology (NSDQ: STX), L Brands (NYSE: LB) and Kimco Realty (NYSE: KIM) are anywhere from 33% to 55% below their 52-week highs. They  all face fierce business headwinds.

Despite their slumps, Kimco and L Brands still have dividend yields below 6%. Yet dividend income seekers can secure a 5.5% yield from another S&P stock riding favorable business trends and just pennies off a record high. That’s not a value trap profile.

Iron Mountain (NYSE: IRM) is a data center operator with 1,455 facilities on six continents and annual revenue in excess of $3.7 billion from more than 230,000 customers, including almost all of America’s largest corporations.

Revenue is growing organically at 2.5% a year and the company is forecasting growth of 8% to 15% this year in adjusted funds from operations, aided by acquisitions and expansion in emerging markets. Since Iron Mountain’s conversion to a real-estate investment trust two years ago, it has paid out at least 90% of available cash earnings, as all REITs must. Last year it increased its payout by 13%, though the pace of increases is likely to slow.

Iron Mountain needs to reduce elevated leverage (at 5.9x adjusted debt to EBITDA) and to retain cash in order to invest in continued growth.

Like other REITs and income investments, Iron Mountain would likely be hurt by a big increase in longer-term interest rates. But it would take a lot to stop it from continuing to deliver a decent distribution yield and modest growth.