Marijuana stocks have been all the rage in the investing world lately, and those who are interested in investing in the space have quickly gotten up to speed about some of the basic ways to make money in the cannabis business. The best-known pure-play marijuana stocks specialize in the growing of raw marijuana plants and the production of refined cannabis products, and many marijuana investors have placed their bets on various companies after making informed choices about whether a particular business has a competitive advantage that will help differentiate it from the many other competitors in the cannabis industry.

However, there's more than one way to make money in cannabis, and you don't have to grow marijuana yourself in order to profit from it. That's the philosophy that Innovative Industrial Properties (NYSE:IIPR) has embraced in serving the cannabis industry, and the result has been something you won't get from most other marijuana stocks: a dividend.

Marijuana leaf on top of stack of $100 bills.

Image source: Getty Images.

How Innovative Industrial Properties works

Some of the best businesses in the world have very simple business models, and Innovative Industrial Properties has distinguished itself by turning an easy-to-understand strategy into a booming opportunity. The San Diego–based company bills itself as the leading provider of real estate capital for the medical-use cannabis industry. Organized as a real estate investment trust, Innovative Industrial seeks investment capital from investors and uses it to acquire real estate assets.

That's a business model that countless REITs use, but Innovative Industrial's spin is that it concentrates on working with experienced growers of medical-use cannabis in states whose legal and regulatory environments allow for that production. Marijuana companies lease space from Innovative Industrial, preventing them from having to spend valuable capital on fully owned production facilities and giving the REIT the opportunity to profit. For cannabis producers that have already purchased real estate, Innovative Industrial's sale-and-leaseback program offers an opportunity to extract capital for use in core business operations.

The terms that Innovative Industrial is able to command are quite attractive. According to the REIT, a typical deal involves assets worth $5 million to $30 million and up, with lease terms of 10 to 20 years and rent that starts at between 10% and 16% of the total investment in the property. The base rent is subject to escalation clauses at 3% to 4.5% per year. Depending on the credit quality of the tenant, Innovative Industrial arranges customized security deposit and guaranty provisions to protect its interest in the real estate.

A growing business...

Already, Innovative Industrial has accumulated an attractive portfolio of real estate assets connected to medical cannabis production. Nine different facilities across the nation have arrangements between Innovative Industrial and tenants, with five different producers among the REIT's client list. As company executive chair Alan Gold explained in the most recent quarterly conference call, Innovative Industrial's holdings across seven states total about 875,000 square feet, and with a 100% occupancy rate, the REIT's current blended yield on its portfolio is an amazing 15.7%.

That said, Innovative Industrial has only tapped into a tiny portion of the total potential market for cannabis-related real estate. Adjusted funds from operations for the second quarter of 2018 amounted to just $2.1 million, but that's up markedly from the corresponding $1.4 million figure from the first quarter. Notably, Innovative Industrial has been able to reach this point without having to raise any debt, relying solely on common and preferred stock to raise capital. A recent secondary offering of 2.6 million shares of stock to raise $104 million shows the demand from investors for access to Innovative Industrial's business opportunity.

... with growing dividends

Shareholders have reaped the benefits of Innovative Industrial's growing size and industry penetration. After forming near the end of 2016, the REIT paid its first dividend of $0.15 per share in June 2017. Since then, payouts have risen twice, climbing to $0.25 per share quarterly as of December 2017 and $0.35 per share in its most recently declared quarterly dividend payment. Even with shares of the REIT having more than doubled in the past year, the latest payout is good for a 3.3% dividend yield. Again, that's not out of line for real estate investment trusts generally -- but you'd be hard pressed to find many other marijuana stocks that pay any dividend at all.

Cannabis offers a huge opportunity to investors right now, but it's important to be smart in the way you invest in marijuana stocks. With its different angle at profiting from cannabis production, Innovative Industrial Properties has a lot of room to grow in the months and years to come, and its shareholders could continue to see interest in marijuana stocks drive the value of their investment higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.