The marijuana industry is a lot of things. It's a potentially once-in-a-generation growth opportunity for investors, with up to $75 billion in full-year sales expected by the time 2030 rolls around. This rapid sales growth is a big reason more than a dozen marijuana stocks now have market caps that top $1 billion.

It's also an industry with plenty of built-in risks considering that very few pot stocks are currently profitable, and that regulatory red tape has substantially held back the Canadian weed industry since recreational marijuana was legalized in October.

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Dividends are a real rarity for marijuana stocks

However, one thing the marijuana industry is not (at least yet) is an income generator. Although there are marijuana stocks that pay a dividend, these companies aren't what we'd consider "pure plays."

For instance, Scotts Miracle-Gro generated 13% of its previous fiscal-year sales from its subsidiary, Hawthorne Gardening, which supplies lighting, soil, nutrient, and hydroponic solutions to the North American cannabis-growing industry. Although Scotts pays out a 2.5% yield, it still generates the bulk of its revenue from its lawn, garden, and crop-care products.

Likewise, Molson Coors Brewing is in the process of developing a line of nonalcoholic cannabis-infused beverages via its partnership with Quebec-based HEXO. This partnership, known as Truss, will be rolling out its line of beverages as soon as Health Canada gives the OK within the next four months. But when taken as a whole, Molson Coors, despite a 3% dividend yield, reels in most of its sales from alcoholic beverages. Although it's a marijuana play, it's not what we'd call a pure play.

This is an industry unlikely to see much in the way of income plays given that most operating income, at least for the foreseeable future, will be reinvested into capacity expansion, marketing, brand building, product development and diversification, and international expansion. Since dividends are most often paid out by companies with slowing growth prospects, cannabis stocks probably aren't the best bet to generate income. But there are exceptions to this rule.

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This pure-play pot stock is putting more money in investors' pockets...again

Right now there's only one pure-play marijuana dividend stock: Innovative Industrial Properties (IIPR -0.72%).

Last week, Innovative Industrial Properties -- the very first cannabis play to debut on a major U.S. exchange, via an initial public offering on the New York Stock Exchange in December 2016 -- announced its second-quarter dividend. The new distribution of $0.60 per share represents a 33% increase from the sequential first-quarter payout, and marks the second consecutive quarter that the company has lined its shareholders' pockets with more income. Here's a brief history of its dividend growth since going public (the month listed represents when the dividend was issued):

  • July 2017: $0.15 per share
  • October 2017: $0.15
  • January 2018: $0.25
  • April 2018: $0.25
  • July 2018: $0.25
  • October 2018: $0.35
  • January 2019: $0.35
  • April 2019: $0.45
  • July 2019: $0.60

At $2.40 on an annualized basis, Innovative Industrial Properties is now yielding closer to 2%, up from around 1.5%. 

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Here's why IIP is the perfect cannabis income play

The reason Innovation Industrial Properties, or IIP as it's also known, is the perfect marijuana income play has to do with its business classification as a real estate investment trust (REIT).

REITs acquire land and building assets within a specific industry or sector with the intent of leasing out these properties for an extended time in order to generate rental income. In IIP's case, it acquires land, cultivation farms, and processing facilities for the cannabis industry, then leases these assets out for a long time.

The advantage of being a REIT is that the net income isn't taxed at the normal corporate rate. Rather, REITs receive special tax treatment as long as they return a substantial portion of their net income to investors in the form of a dividend. Generally speaking, the more profitable a REIT becomes, the more money shareholders will receive on a per-share basis in the form of a dividend.

As for IIP, it currently has 21 properties in its asset portfolio spanning 11 states, which includes the acquisition of six properties in California just since 2019 began. The weighted-average remaining lease spanning these assets is 15.1 years, with an average current yield on its more than $210 million in invested capital of 14.7%. In layman's terms, this just means that the company should have a complete payback on its invested capital in less than five years. 

It's worth pointing out that IIP also offers very modest organic growth opportunities. Its lease contracts include a 3.25% annual rent increase, as well as a 1.5% management fee that's based on the base rental rate (which rises by 3.25% a year).

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Buyer beware?

Taking into account this modest organic growth rate, as well as the ability to acquire new properties and thereby grow its net operating income, it might appear that nothing can stop Innovative Industrial Properties. But shareholders and prospective buyers should be mindful of one key expansionary tactic of REITs: share-based dilution.

Despite being incredibly profitable, and fully expected to remain that way, IIP has cash flow from operations that is nowhere near sufficient to fund its aggressive expansion tactics. In order to grow its asset portfolio, IIP is going to need to turn to common-stock issuances to raise capital for future purchases. Issuing stock is a really common tactic for REITs to raise cash, but as with all share-based issuances, it can hurt existing shareholders.

It's also worth pointing out that having more shares outstanding can also slow dividend growth on a per-share basis.

To boot, Wall Street views it as one of the cannabis industry's most overvalued companies at the moment. The Street's price target on the company is a mere $85.50, yet we witnessed shares push to north of $125 this week. Although Wall Street can be just as fallible as any retail investor, this disparity is certainly worth taking note of.

There's nothing to suggest that Innovative Industrial Properties can't continue to succeed. But this exponential rise in its share price, even with a growing dividend, is unlikely to continue.