Investing in dividend stocks might seem easy -- pick a stock with juicy dividend yields, invest a truckload of cash in it, then sit back and enjoy enormous gains in the long run. But there's a lot more to income investing than that. Beyond strong yields, a great dividend payer also must show a commitment to increasing its payouts regularly, finance those dividend checks from free cash flow (with some money left over for investing in the business), and run a strong business that will be around for decades to come without skipping a beat on the dividend boosts.

What Iron Mountain is doing right

At first glance, ultra-secure storage specialist Iron Mountain (NYSE:IRM) looks like the perfect dividend investment. Iron Mountain's dividend yield is a meaty 7.3%, near all-time highs for that crucial metric. The company has increased its annual payouts every year since the dividend policy was started. Operating as a real estate investment trust (REIT), the company is required to pay out at least 90% of its taxable income to shareholders in the form of dividends. So Iron Mountain simply cannot stop supporting its generous dividend policy, or it would lose the favorable tax treatment that comes with the REIT status.

These payouts make a real difference to shareholders' value, too. Iron Mountain's stock has delivered a 50% return over the last 10 years, but the stock tripled in value if you reinvested all the dividends along the way.

So the yield is generous and the company is dead serious about growing its payouts annually. That's all she wrote, right? Here's the perfect dividend stock!

A piggy bank cowers in fear before a hand holding a hammer.

Image source: Getty Images.

What Iron Mountain could do better

Well, not so fast. This is actually far from a perfect dividend investment.

First of all, that unbroken streak of constant payout boosts looks a bit less impressive when you consider that it's less than a decade long. Iron Mountain paid its first dividend in February of 2010. This is not a deal-breaker since plenty of respectable income stocks come with shorter dividend histories than 10 years, but it is still worth noting.

Dividend increases have been slowing down dramatically in recent years. Iron Mountain raised its annual payout by 13% in 2016, 6.8% in 2017, 4% in 2018, and only 1.2% this year. Great dividend payers should move that trend line in the opposite direction, accelerating their payout boosts on a regular basis.

And then there's the cash-based quality of Iron Mountain's dividend checks. The company generated $218 million in free cash flow over the last four quarters. In the same period, the company also sent out dividend checks worth $697 million. Iron Mountain's dividend payouts have been larger than the company's free cash flows in each of the last seven years -- and often by a wide margin. So there's no ideal cash-based payout happening here. Instead, the dividend policy has been financed by a steady stream of cash-out debt refinancing moves over the years.

Adjusted adjustments to an adjusted profit measure? No, thanks.

Iron Mountain's management likes to compare its payouts to a proprietary metric that starts with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), backs out all noncash expenses, and then takes away another bucket of real estate investment costs. If it were up to me, I'd call that a triple-adjusted EBITDA profit, which exceeded Iron Mountain's dividend expenses by 13% in 2018.

That makes Iron Mountain look good to investors who simply glance at the reported dividend payout ratio, but only as long as they don't worry too much about the quality of the underlying cash sources. Relying on adjustments to other adjustments is enough to make me queasy. Iron Mountain might be interesting if and when the company starts to generate more cash than its dividend policy consumes.

And that's not what I see in Iron Mountain today. You might consider this ticker on the merits of potential growth as the current turnaround program plays out, but it's not exactly a fantastic dividend stock in my book.