Tilray (TLRY +0.00%) made a lot of early investors rich this year, but now that it's a $10.6 billion company, further gains won't be so easy to come by. In fact, buying the stock at the moment is an extremely risky bet. Tilray investors need to worry about gaining a significant share of legal cannabis sales in Canada, and the market's extremely unpredictable. Legal Canadian cannabis sales could reach $5 billion next year, but oversupply issues and competition with the unregulated illicit market could make it hard for Tilray to turn a profit.
The market for legal cannabis has a lot of room to grow, but Tilray probably isn't a good stock for anyone's portfolio right now. Instead, you might want to consider Innovative Industrial Properties (IIPR +1.41%) and OTC Markets Group (OTCM 3.13%). Both run businesses that the cannabis industry can't live without, and they're positioned to thrive even if conditions for Tilray get rough.
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Innovative Industrial Properties: Rent collector
Tilray lost $36.7 million during the first nine months of 2018, but this marijuana business is already generating a profit. Innovative Industrial Properties is a real estate investment trust (REIT), which means it avoids taxes as long as the company distributes nearly all the profits it generates to investors as dividends.
Innovative Industrial's bottom line is growing, and shareholders' quarterly payouts are rising along with it. During the third quarter, management reported $0.38 per share in adjusted funds from operations, which were 22.6% higher than the previous quarter. As a result, the company has been able to raise its quarterly payout 133% since 2017, to the present rate of $0.35 per share.
Innovative Industrial's payout works out to an unattractive 2.8% yield at recent prices, but investors can probably look forward to more big payout bumps in the quarters ahead. As of Nov. 7, 2018, Innovative Industrial owned just 10 properties in eight different states, all of which are occupied with an average remaining lease length of 14.7 years. Three properties have been acquired since July, and Innovative Industrial isn't showing any sign of slowing down.
This REIT's cash flows should be the most dependable in the industry because it insists that tenants sign triple-net leases, which means the renter is responsible for variable costs such as property taxes and building maintenance.
Generally, tenants that sign triple-net leases pay lower rent, but Innovative Industrial is collecting enough to report a 15.4% average yield on invested capital. With rising demand for space to cultivate, process, and sell cannabis across the U.S., this stock could put heaps of dividend income in your brokerage account.
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OTC Markets Group: The bridge to cannabis capital
This stock isn't a REIT, but OTC Markets Group produces a steady profit that it shares with investors. Thanks to federal laws that restrict a growing cannabis industry, any company that operates in the U.S. can't list on the NYSE and Nasdaq exchanges because they produce or sell an illegal substance.
Though the Canadian Securities Exchange (CSE) isn't Canada's largest exchange, it's growing because it isn't bothered about listing U.S. companies that sell cannabis like the snobby Toronto exchange. Last year, OTC Markets entered an alliance with CSE that makes it easy for most U.S.-based retail investors to buy CSE-listed companies from their discount brokerage accounts.
The alliance is a hit with capital-hungry cannabis companies. The CSE has already boosted membership of its Canna List by 68% in 2018, to 111 companies listed. To illustrate how badly companies want to access to U.S. investors, OTC Markets hiked its annual fee 20% this year, which clearly didn't deter companies from signing up. At the end of September, total listings were 5.4% higher than a year earlier.
At recent prices, OTC Markets offers a quarterly dividend that offers a 2% yield. That's below average on its own, but OTC Markets also sends out special dividends that keep rising, and the one it sent this November works out to 2.2% at the stock's recent price.
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How much are dividends in the hand worth?
Owning shares of a landlord and stock exchange might not be as exciting as buying companies that grow enough cannabis to fill football stadiums. Tilray sparks lots of interest, but it isn't going to deposit any money in your account in the foreseeable future.
Shares of OTC Markets and Innovative Industrial Properties aren't guaranteed to rise, but the dividends they send are yours to keep. That makes them far better stocks to buy right now.
