Until somewhat recently, there wasn't a hotter industry on the planet than marijuana. With tens of billions of dollars in sales being conducted annually in the black market, it seemed only logical that Canada legalizing adult-use weed and more U.S. states waving the green flag on cannabis would lead to exceptional legal-channel sales growth.
But as is the case with all "next big thing" investments, the pot industry has hit some stumbling blocks. Canada has contended with regulatory-based supply and overcapacity issues, while the U.S. market has been plagued by high tax rates on legal product and minimal access to traditional forms of financing.
There's little question that the cannabis industry is going to deliver big-time returns in the years to come. However, it's going to require patience on the part of investors. To this I say, "Why not get paid while you wait?"
Below you'll find three ways you can collect a dividend while garnering either direct or indirect exposure to marijuana stocks.
Image source: Getty Images.
Invest in a pure-play pot stock
The fact is that the vast majority of pure-play marijuana stocks aren't profitable, and the few that are have been reinvesting most of their operating income back into their business. The only way investors can reap the reward of dividend income with a pure-play cannabis stock is to go with Innovative Industrial Properties (IIPR 1.25%).
Innovative Industrial Properties is a cannabis-focused real estate investment trust (REIT). As with any REIT, the game plan is to acquire assets and lease them out for an extended period of time. In IIP's case, it purchases cultivation and processing assets, then leases them out for 10-year to 20-year periods.
The company also passes along an annual rental increase to its tenants to stay ahead of the inflationary curve and collects a 1.5% management fee that's tied to the base rental rate. Thus, there's a modest organic growth component built into IIP's business model.
After beginning 2019 with 11 properties in its portfolio, Innovative industrial Properties now owns 58 assets with a weighted-lease length of 16.2 years. Although the company stopped reporting its average yield on invested capital during the first quarter, this previous figure implied a complete payback in less than six years.
Best of all, since IIP is a REIT, it's required to pay out a substantial portion of its earnings to its shareholders in the form of a dividend. This lets it avoid normal corporate income tax rates. As a result, Innovative Industrial Properties has grown its quarterly payout by more than 600% over the past three years to $1.06. That works out to a cool 4.4% yield, which is more than double the average yield of the S&P 500.
Image source: Getty Images.
Consider a brand-name ancillary player
If the idea of a pure-play pot stock paying over 4% annually doesn't excite you, consider buying into an ancillary player or equity investor where cannabis represents a smaller percentage of total revenue. Here, you have three excellent choices:
Scotts Miracle-Gro, which is currently paying out 1.7%, is best known for its lawn and garden care products. While these traditional products still account for close to 80% of total sales, Scotts' subsidiary, Hawthorne Gardening, was responsible for 17% of sales during the fiscal second quarter. Hawthorne supplies hydroponic equipment to indoor cannabis cultivators, as well as lighting, nutrient, and soil solutions. In fiscal 2020, Hawthorne is expected to deliver 40% to 50% sales growth and should remain a key growth driver for Scotts Miracle-Gro for the foreseeable future.
Meanwhile, Constellation Brands and Altria Group are in the cannabis business as equity investors. Constellation owns a nearly 39% stake in Canopy Growth (CGC +2.88%), while Altria holds a 45% stake in Cronos Group (CRON +0.58%). Despite Canopy and Cronos sporting a boatload of cash following these equity investments, neither deal has been particularly noteworthy for the companies involved -- at least not yet.
However, Constellation has installed its former chief financial officer as the new CEO of Canopy Growth, while the launch of vapes in Canada (which began in mid-December) could begin bearing fruit sooner than later for Cronos Group. Should you be interested in Constellation and Altria Group, they're currently yielding 1.6% and 8.5% (not a typo!), respectively.
Image source: Getty Images.
When in doubt, buy a basket fund
But there's still another way to collect dividend income by investing in pot stocks. If purchasing individual names sounds a bit daunting, then perhaps it's time to consider an exchange-traded fund (ETF) with a specialized focused on marijuana. Here you have two choices: the ETFMG Alternative Harvest ETF (MJ +5.50%) or the smaller Horizons Marijuana Life Sciences ETF (HMMJ 0.55%).
The point of buying an ETF is that you're going to get instant diversification with the click of a button. The ETFMG Alternative Harvest ETF currently has three dozen equities in its portfolio and sports more than $580 million in net assets. Comparatively, the Horizons Marijuana Life Sciences ETF has only about $272 million in net assets and is significantly more concentrated in just a few pot stocks, despite the fact that it holds a stake in 33 pot stocks.
Because the disbursement schedule for marijuana ETFs can vary wildly, posted yields should be taken with a grain of salt. However, the ETFMG Alternative Harvest ETF has paid out 7.5% on a trailing-12-month basis, with the more volatile Horizons Marijuana Life Sciences ETF boasting an extrapolated yield closer to 10.8%. It's unclear if these distributions are sustainable at these levels, but it's to be expected that ETF investors will receive some form of distribution every quarter.
