Investors were pretty high on the future of marijuana stocks a year ago, but share prices for almost every publicly traded company in the industry have gone up in smoke since then. Even though the industry is seeing rapid growth of sales as the legalization of cannabis spreads, it turns out it's harder than some might think to make a profit in this chaotic environment.

Well, one company in the cannabis industry seems to be making money hand over fist and returning a nice chunk of it to investors in the form of dividends. Innovative Industrial Properties (NYSE:IIPR) pays an enticing 6% yield after raising its quarterly dividend in February to $1.00, a 186% increase from the payout a year ago. Should dividend investors consider adding this pot stock to their portfolios?

Innovative Industrial Properties (IIP) is a real estate investment trust (REIT) that specializes in leasing properties to state-licensed cannabis producers in the U.S. that are in the medical marijuana business. These properties are generally indoor growing facilities with highly specialized climate control, lighting, and security systems that are needed to maximize cannabinoid levels and yield, while protecting the high-value crop from theft.

Marijuana growing in a greenhouse.

Image source: Getty Images.

Real estate for an industry starved for capital

The company is taking advantage of a situation where marijuana producers need every dollar of capital they can get their hands on to expand capacity. With marijuana still illegal at the federal level in the U.S., licensed producers are challenged in their ability to get loans from banks, and it's certainly not a great time to raise capital through secondary offerings of stock.

IIP will typically buy a cannabis operator's growing facilities and lease them back on a triple-net basis – meaning the tenant pays taxes, insurance, and maintenance -- giving the producer an influx of cash from the sale. The company has 51 properties comprising 3.2 million rentable square feet in 15 states, up from 11 properties and 1.0 million square feet just a year ago. Leases have a weighted average length of over 15 years, with annual escalations of 3% to 4%.

IIP raises the money for property purchases by issuing new shares of its stock, which dilutes the ownership of its stockholders, but still builds value because of the high return on those investments. Adjusted funds from operations (AFFO) per share, the metric that REIT investors tend to use to understand profits, rose 211% to $1.18 in Q4, despite the weighted average number of shares growing 27% from the period a year earlier.

In fact, everything about this company screams rapid growth. Revenue in the last quarter increased 269% and established new tenant relationships with four new licensed producers, including Green Thumb Industries (OTC:GTBIF) and Cresco Labs (OTC:CRLBF). From October 1 2019 to the end of February, the company increased its number of properties by 65%. 

A buy, but not for the dividend

With a dividend yield over 5% and a payout that's growing rapidly, it might seem on the surface that Innovative Investment Properties is a great dividend stock. However, these shares don't really meet the profile that conservative dividend investors are usually looking for. The stock price is subject to the volatility that affects all stocks in the marijuana industry and wild swings are common.

For example, in the two weeks between March 4 and March 18, the shares fell $51, or 53%. The annual dividend today stands at $4, meaning that in 14 days, the stock fell over 12 times what an investor can expect in a year of dividend payments. Most investors would expect dividend stocks to add an element of stability to their portfolios, but the situation with IIP is exactly the opposite. A decade of dividend payments can be swamped out by potential capital gains or losses in a few days.

That doesn't mean that the stock isn't a buy, though. The company has a great growth business that's still in early days. Whatever happens with marijuana producers in general, they need growing facilities, and IIP provides a means to expand square footage. The company expects growth of the U.S. regulated cannabis industry, which was 34% in 2019, to continue.

Long term investors should view Innovative Investment Properties for what it is: a growth stock with a dividend payout that could provide some support to the stock price. Dividend investors may want to skip this one, but growth investors who want some exposure to the marijuana industry and are patient enough to ride out the volatility are getting a good opportunity to buy the shares now at less than half their 52-week high.

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.